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by Howard Haykin

BB&T Securities, a dually registered broker-dealer and investment adviser (“BD/IA”), agreed to pay $5.7 million in fines, restitution and prejudgment interest on behalf of Valley Forge Asset Management, a firm it had recently acquired that was now charged by the SEC with misleading advisory clients into believing they were receiving full service brokerage services in-house at a discount while significantly less expensive options were available externally.

THE PLAYERS.    In August 2015, BB&T Corporation - parent company of BB&T Securities – acquired the parent entity of Valley Forge Asset Management, also a BD/IA. In March 2016, Valley Forge was merged into BB&T Securities.

WHAT WENT WRONG.   From at least 2013 to 2016 (the “Relevant Period”), Valley Forge offered its advisory clients three choices for brokerage services – one of which was to direct his or her brokerage to Valley Forge’s own “full service brokerage.” To promote the “Affiliated Brokerage” option, Valley Forge told clients that they could obtain a discount of at least 70% off the broker-dealer’s “full commission rate” – which prompted more than 1,200 of Valley Forge’s 2,000 or so advisory clients to select the ‘Affiliated Brokerage’ option.

As it turned out, Valley Forge's statements and disclosures about its brokerage services and prices - to convince clients to choose the in-house broker - were misleading and inadequate. 

• Despite promises of a high level of service at a low cost, clients who opted for ‘Affiliated Brokerage’ only received the same basic services that other clients received – i.e., those who opted for less expensive alternatives.
• Commissions that Valley Forge charged averaged roughly 4.5 times more than what clients would have paid using other brokerage options – a fact that the firm obscured by claiming it was giving clients a 70% discount off of its supposed retail commission rate.

►     ‘Affiliated Brokerage’ clients paid an average commission rate of $.18/share;

►     ‘Directed Brokerage’ clients paid an average commission rate of $.04/share;

►     ’Discretionary Brokerage’ clients (typically large institutional clients) paid even less.

VIOLATIVE CONDUCT AND SEC SANCTIONS.   Based on the foregoing, BB&T Securities as successor in interest to Valley Forge, violated Section 206(2) (Prohibited Transactions by Investment Advisers) and Section 207 (Material Misstatements) of the Investment Advisers Act of 1940. BB&T Securities agreed to pay disgorgement of $4,700,000, prejudgment interest of nearly $497,000, and a penalty of $500,000.  BB&T Securities has ended Valley Forge’s existing directed brokerage program by amending its cost structure and its disclosures.

For further details on this case, click on ... SEC ORDER.