On November 26, 2013, the SEC issued an order instituting administrative and cease-and-desist proceedings against hedge fund manager Parallax Investments, LLC (Parallax) and a second order against investment adviser Tri-Star Advisors, Inc. (TSA), and executives of each firm. The orders charged respondents with, among other things, engaging in thousands of principal transactions through an affiliated brokerage firm without notifying their clients or obtaining the required consent beforehand as required by Section 206(3) of the Investment Advisers Act of 1940 (Advisers Act). See “When and How Can Hedge Fund Managers Engage in Transactions with Their Hedge Funds?
,” Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011). The SEC also charged Parallax and its chief compliance officer with violating Rule 206(4)-2 of the Advisers Act (Custody Rule) for failing to comply with the exception from various Custody Rule requirements as a result of reliance on the pooled investment vehicle exception. See “How Does the SEC Approach Custody Issues in the Course of Examinations of Hedge Fund Managers?
, Hedge Fund Law Report, Vol. 5, No. 18 (May 3, 2012); and “Recently Published SEC Risk Alert Reveals Significant Deficiencies in Custody Practices of Hedge Fund Managers and Other Investment Advisers
,” Hedge Fund Law Report, Vol. 6., No. 10 (Mar. 7, 2013). The SEC also charged Parallax with failing to establish a tailored compliance manual and to conduct annual compliance reviews as required by Rule 206(4)-7 under the Advisers Act and for failing to establish and maintain a code of ethics as required by Rule 204A-1 under the Advisers Act. See “How Hedge Fund Managers Should Approach Preparing For, Conducting and Documenting the Annual Compliance Review (Part Two of Two)
,” Hedge Fund Law Report, Vol. 5, No. 13 (Mar. 29, 2012); and “Key Legal and Operational Considerations for Hedge Fund Managers in Establishing, Maintaining and Enforcing Effective Personal Trading Policies and Procedures (Part One of Three)
,” Hedge Fund Law Report, Vol. 5, No. 3 (Jan. 19, 2012). This article summarizes the SEC’s factual and legal allegations levied against Parallax, TSA and their executive officers.