A large hedge fund sponsor agreed to pay $180 Million in restitution and interest for recommending proprietary hedge funds that collapsed during the financial crisis. According to the SEC, affiliated financial advisers and the fund manager described the funds, which employed significant leverage, as safe, liquid, bond alternatives. The oral communications contradicted statements made in written disclosure documents. The respondents continued to sell the funds even as they experienced significant financial deterioration in 2007. The SEC charges violations of the anti-fraud rules as well as the compliance rule (206(4)-7) for failing to implement policies and procedures to supervise oral sales communications. Andrew Ceresney, Director of the SEC’s Enforcement Division, said “Firms cannot insulate themselves from liability for their employees’ misrepresentations by invoking the fine print contained in written disclosures.”
OUR TAKE: Compliance policies must include procedures to make sure that sales representatives don’t contradict the written offering documents. These procedures could include approval of presentations, listening to recorded conversations, training, and supervisory participation in sales meetings.