The SEC fined a large commercial bank for failing to disclose that it only recommended hedge funds that paid a portion of the management fee back to the bank. The bank marketed a robust due diligence process conducted by a purportedly independent, in-house research group performing a multi-step due diligence process to select hedge funds from an “extremely large universe.” In fact, the bank only recommended hedge funds that paid back management fees that it called “retrocessions.” Although the bank disclosed that it might receive revenue sharing and the amount actually received from each hedge fund, the actual due diligence process did not comport with marketing promises. The bank, which is not a registered adviser or broker-dealer, was charged with violating the Securities Act’s anti-fraud provisions (17(a)(2)).
Check the marketing team’s enthusiasm at the door. The SEC doesn’t allow firms an exception from the securities laws for product hype, regardless of how clients/investors may perceive the statements. Rather than caveat emptor (buyer beware), caveat venditor (seller beware) governs sales of securities products.