SEC Sanctions Dual-Registered Investment Adviser/Broker Dealer for Disclosure Failures and Breaches of Rules Regarding Best Execution, Compliance Policies and Principal Transactions

The SEC recently settled an administrative action against a dual-registered adviser and broker, and one of its registered adviser representatives.  The firm allegedly failed to have policies and procedures in place to assure best execution for its clients, failed to disclose a conflict of interest regarding rebates from a clearing broker, made material misstatements concerning commissions and principal transactions and failed to obtain client consent when it engaged in principal transactions.  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 registered adviser representative allegedly caused certain of those violations.  Due to the conflicts of interest that arise when an entity provides both advisory and brokerage services, potential violations by dual-registrants have been among the SEC’s recent priorities in enforcement activity focused on private funds.  See “Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part Three of Three),” Hedge Fund Law Report, Vol. 7, No. 9 (Mar. 7, 2014).  This article describes the factual allegations, alleged violations and sanctions outlined in the SEC’s Order in the matter.  This article concludes with insight from Goodwin Procter on the interaction between the Order and the “bad actor” provisions of Rule 506(d) under Regulation D that were adopted by the SEC pursuant to the JOBS Act.  See “How Can Hedge Fund Managers Negotiate the Structuring, Operational and Due Diligence Challenges Posed by the Bad Actor Disqualification Provisions of Rule 506(d)?,” Hedge Fund Law Report, Vol. 6, No. 39 (Oct. 11, 2013).

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