IA Reps Settle Charges for Unregistered Broker Activities

Three investment adviser representatives settled separate SEC charges for acting as unregistered brokers in selling membership interests in LLCs that invested in pre-IPO companies. The investment adviser separately settled SEC charges for failing to manage disclosed conflicts of interest in a manner consistent with its representations.

According to the Orders, the investment adviser representatives engaged in unregistered broker activities, including:

• the first adviser representative solicited at least $6 million in investments for the funds from at least 80 investors. He received over $142,000 in transaction-based compensation.
• the second adviser representative solicited at least $6 million in investments for the funds from at least 80 investors. He received over $145,800 in transaction-based compensation.
• the third adviser representative solicited at least $1.1 million in investments in the funds from at least 19 investors. He received over $67,000 in transaction-based compensation.

The SEC found that the three adviser representatives violated SEA Section 15(a) ("Registration and regulation of brokers and dealers").

To settle the charges, the adviser representatives agreed to (i) cease and desist from further violations; (ii) a 6-month suspension from participating in any offering of a penny stock and from association with any broker-dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; (iii) pay disgorgement fees; and (iv) pay civil penalties of $40,000 (for the first two representatives) and $20,000 (for the third representative). 

Separately, the SEC determined that the investment adviser (for whom the representatives worked) failed to manage a disclosed conflict of interest as promised in its firm brochures. The SEC said that the firm acknowledged a financial conflict of interest when recommending investments in private funds managed by an affiliated entity under shared ownership and pledged to mitigate the conflict by adhering to client-approved investment policies and adopting policies to ensure recommendations were in clients' best interests. The SEC found, however, that the firm required clients investing in the affiliated funds to acknowledge disclaimers, stating the firm was not acting as their adviser in those transactions. The SEC found that these statements contradicted the firm's brochure "and further could lead a client to believe incorrectly that the client had waived a nonwaivable cause of action against [the firm] that was provided by state or federal law."

As a result, the SEC found that the firm violated IAA Section 206(2) ("Prohibited transactions by investment advisers).

To settle the charges, the firm agreed to (i) cease and desist from further violations, (ii) a censure and (iii) pay a $100,000 civil monetary penalty.