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Fund Manager Failed to Register as Broker-Dealer

A former fund manager was barred from the industry and faces possible fines and disgorgement for misrepresenting fees and commissions and for selling the fund without registering.  His partner previously settled with the SEC by agreeing to pay over $1.2 Million.  According to the SEC, the defendant hid the nature of the compensation received for selling the fund, which constituted transaction-based compensation requiring broker-dealer registration.  The SEC also charged the adviser with failing to register his firm as an investment adviser and with securities fraud. 

Fund managers that engage in selling efforts must register as broker-dealers unless they can take advantage of the issuer exemption (Rule 3a4-1), which prohibits the receipt of specific transaction-based compensation. 

Large Custody Bank to Pay $32 Million for Undisclosed Transition Management Compensation

A large custody bank agreed to pay $32.3 Million to settle allegations that it charged undisclosed commissions and mark-ups as part of its transition management services to large plans and sovereign wealth funds.  According to the SEC, the respondent’s scheme involved bidding for transition management projects with artificially low commission schedules and then charging undisclosed mark-ups and concealing those mark-ups when reporting to clients.  The SEC’s investigation included emails and recorded conversations where internal employees (i) referred to such concealed mark-ups as a “rounding error,” (ii) committed to “make it work” internally when forced to bid at low commission rates, (iii) bragged that they would “back the truck up” when describing the undisclosed commissions, and (iv) vowed that “This can of works stays closed” when discussing their scheme.  A client’s consultant ultimately discovered the undisclosed commissions.

OUR TAKE: You do know that your emails are retained and your conversations are recorded?  Right?  The bad old ways of hoping you won’t get caught just have no place in the modern regulatory world where compliance officers, clients (and their consultants), and regulators all review sales activity and disclosure.


Broker-Dealer Responsible for Trading Desk’s Unlawful Trading Practices

An interdealer broker agreed to pay $2.5 Million in disgorgement for failing to disclose markups and markdowns on securities traded for clients.  According to the SEC, the broker-dealer’s Cash Equity Desk marketed its services as agency only, charging commissions between 1 and 3 cents per share.  However, the SEC alleges that during periods of market volatility, the Cash Equity Desk charged additional markups and markdowns on trades without telling clients and then misleading them about actual purchase/sale prices.  The conduct also violated its compliance policies.  The SEC faults the entire firm for the unlawful misconduct because the employees were “acting within the scope of their authority.”

OUR TAKE: Firms encountering bad conduct by a small number of employees will have a hard time making the “rogue employee” defense.  The SEC has increasingly taken a more strict liability approach whereby the firm is liable for all actions of all employees.