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Broker Should Have Disclosed Investment Product Red Flags


An unregistered broker agreed to pay $600,000 to settle charges that he sold third party investments without disclosing numerous red flags and negative facts to potential investors.  According to the SEC, the respondent painted an overly rosy picture of the investments (ultimately Ponzi schemes) and the sponsor by highlighting consistent rates of return and a personal business relationship.  However, the respondent did not disclose that the sponsor had previous issues with the SEC, multiple failed investments schemes, and financial problems.  The SEC argues that once the respondent described the investments in a positive way, he “was under a duty to make materially fair and complete disclosure rather than presenting only a one-sided and unbalanced view of the investment.”  The SEC charges the unregistered broker with violating the antifraud provisions of the Securities Act.

When selling investment products, you cannot merely disclose the good facts.  In this case, the respondent may not (or may) have known the investments were Ponzi schemes, but he did have enough facts to suspect and should have warned potential investors. 

Longstanding Church Fund Violated Fiduciary Duty

The sponsor of a church fund agreed to pay over $2.25 Million in returned profits, disgorgement, interest and penalties for failing to properly disclose a reserve fund created to smooth returns.  According to the SEC, the Board of the fund, which was launched in 1973, created the reserve fund in 1993 as a vehicle to retain excess profits and ensure liquidity so that the fund could distribute consistent returns between 5% and 6.7%.  The SEC faults the fund sponsor for failing to fully disclose that it would charge fees on the reserve fund and that redeeming investors would not receive their pro rata amounts held in the reserve fund.  OCIE identified the fiduciary violations during a 2014 exam, which followed the sponsor’s registration in 2012.

OUR TAKE: The SEC appears to be most disturbed that the fund sponsor did not return client assets and double-dipped advisory fees by moving assets into the reserve fund.  Private fund firms that registered after 2012 as a result of Dodd-Frank, should audit their operations to determine whether longstanding business practices run afoul of their fiduciary duties.


PE Firm Censured for Failing to Disclose Investment in Service Provider


The SEC fined and censured a private equity fund manager for failing to disclose that the principals had personally invested in an IT firm that it had engaged.  The respondent utilized the IT firm to perform due diligence before investing in portfolio companies.   The SEC asserts that the firm failed to disclose that firm principals invested in the IT firm and occupied Board seats and that the IT firm’s CEO is the brother-in-law of one of the principals.  Although the SEC acknowledges that neither the PE firm nor the principals profited and that the amount paid to the IT firm was not a material portion of its revenue, the SEC faults the firm for failing to disclose this conflict of interest in the PPMs, ADV, or to the LP Advisory Committee.

OUR TAKE: The SEC will bring an enforcement action even without any underlying client harm or benefit to the accused.  Here, the mere failure to disclose a personal investment results in a public enforcement action.