Investment Adviser Settles SEC Charges for Undisclosed SPAC Conflicts

An investment adviser settled SEC charges for failing to disclose material conflicts of interest. The conflicts concerned the firm's financial incentives to complete a business combination for a special purpose acquisition company ("SPAC").

According to the cease-and-desist Order, the firm invested client assets in a SPAC without disclosing that the firm and its personnel owned "founders' shares" and private placement warrants in the SPAC sponsor. The SEC found that the value of these shares was contingent upon the SPAC completing a business combination, which created a financial incentive for the firm to ensure a deal closed.

The SEC stated that during the relevant period, the firm invested over $160 million of client assets into the SPAC via a forward purchase agreement and private investment in public equity. The SEC alleged that these client investments were necessary to complete the transaction, which increased the potential value of the firm's own founders' shares while the client investments decreased in value. The SEC emphasized that the firm failed to disclose that these ownership interests created a material conflict that could cause it to render advice that was not disinterested.

As a result, the SEC charged the firm with violating IAA Section 206(2) ("Prohibited transactions by investment advisers").

The firm agreed to a cease-and-desist Order, a censure, and agreed to pay a civil money penalty of $200,000.