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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.

 

Adviser Barred for Failing to Register as BD for Private Fund Sales

A financial adviser was barred from the industry and ordered to pay over $400,000 in disgorgement and interest for failing to register as a broker-dealer while selling interests in a private fund.  According to the SEC, the respondent identified investors, communicated with them (including in person), advised prospective investors on the merits of the investment, assisted handling funds, and collected transaction-based commissions.  The adviser sold notes issued by a third party fund that ultimately defaulted.  The SEC charges that the respondent’s activities violated Section 15(a)(1) of the Exchange Act, which requires registration as a broker-dealer to sell securities.

OUR TAKE: Over the last couple of years, the SEC has increased enforcement efforts to prosecute individuals and firms who sell private funds without registering as, or becoming affiliated with, a broker-dealer.