The Securities and Exchange Commission ordered a New York City–based RIA and its founder to pay more than $1 million in disgorgement and penalties for allegedly misleading investors about the high commission rates levied by its affiliated broker/dealer, though others offered similar services for lower costs.
Kahn Brothers Advisors (KIA), a New York City RIA with about $689 million in managed assets, was founded in 1978 and is the investment advisory subsidiary of Kahn Brothers Group, which also houses the RIA’s affiliated broker/dealer, Kahn Brothers (KBD). The firm is headed by Thomas Kahn, the chairman, director, president, CIO and CCO for both KIA and KBD, who was named along with KIA as parties in the SEC’s charges.
According to the commission, the firm primarily works with individuals with less than $1 million in invested assets, with a typical advisory fee of 1% AUM. Most of the b/d’s brokerage business comes from KBA’s advisory clients.
The broker/dealer’s “regular” commission rates for advisory clients were based on the standard fixed commission schedule that broker/dealers used to charge clients before May 1975, according to the SEC. But adhering to this decades-old system meant Kahn’s advisory clients could pay hundreds or even thousands of dollars more in transactions to the affiliated broker/dealer.
“Because the pre-1975 schedule leads to lower commission rates as trade sizes increase, KIA client accounts that engage in smaller-sized transactions—typically its smaller-sized accounts—pay a higher overall commission cost on a per-share basis, as compared to client accounts that engage in larger transactions,” the order read.
But, according to the commission, Kahn’s RIA and b/d both failed to adequately disclose that the b/d charged higher commissions than other brokers offering similar services. In disclosure documents, Kahn expressed that commission rates “may” not be the lowest, but the SEC argued this statement failed to relay to clients that commission rates were going to be so high and didn’t make it clear that similar services (for much lower rates) could be found at other brokers.
The disclosures also failed to reveal that by using Kahn’s affiliated b/d, the firm would get more compensation than if they’d used another b/d that didn’t opt for the pre-1975 commission rate.
The b/d and RIA allegedly told clients they’d look to aggregate client transactions if doing so would “effectuate a more favorable execution for the client.” But according to the SEC, Kahn’s RIA “virtually never directed” its affiliated b/d to aggregate transactions.
“Indeed, KIA as a matter of practice did not seek to aggregate client transactions,” the order read. “By failing to aggregate client transactions, KIA caused advisory clients to pay greater commissions to KBD.”
Representatives from the Kahn Brothers Group did not return requests for comment as of press time.
In total, Kahn and the firms agreed to pay $701,799 in disgorgement, $146,100 in prejudgment interest and a civil penalty of $250,000, though it did not admit or deny the SEC’s findings. Additionally, Kahn Brothers and Kahn agreed to a cease-and-desist and censure.