The SEC has commenced enforcement proceedings against an adviser and its principals accused of recommending private funds for which they received revenue sharing without disclosure. The SEC asserts that the respondents received upfront and ongoing asset-based compensation from the fund managers in the form of trailers and a percentage of the GP’s carried interest. The client/investors were shuttled into feeder funds and/or separate share classes that offered lower returns to compensate the respondents. The SEC charges that the adviser failed to properly disclose these conflicts of interest even after warned by OCIE examiners. One of the principals served as CCO but failed implement or test procedures and failed to disclose the revenue sharing arrangements to an outside compliance consultant he retained.
This case reads like a compliance what-not-to-do handbook. Conflict of interest? Check. Undisclosed payola? Check. Reducing client returns? Check. Failing to implement procedures or testing? Check. Dual-hat, conflicted CCO? Check. Ignoring OCIE deficiencies? Check. The adviser has already withdrawn to state registration. We expect a bleak litigation future for these alleged wrongdoers.