Investment Adviser Settles SEC Charges for Stalling Redemptions
Commentary by Steven Lofchie and Conor Almquist
An investment adviser and its CIO settled SEC charges in connection with an alleged scheme to unduly stall the liquidation of assets after two hedge fund clients attempted to redeem their investments.
As outlined in the Order, the SEC found that the adviser deliberately slowed the liquidation process to maintain the investments of the redeeming investors (both university endowments) and offered to redeem one of them faster if the investor agreed to sell its assets to the fund at a substantial discount. The SEC further determined the adviser failed to (i) properly preserve internal communications and (ii) implement appropriate written policies and procedures with regard to redemptions and recordkeeping.
To settle the charges, the adviser agreed to (i) a cease and desist order, (ii) a censure, (iii) a civil monetary penalty of $1,139,501 and (iv) a course of actions to address the compliance deficiencies, such as retaining a compliance consultant. The adviser's CIO also agreed to pay a $500,000 fine.
Commentary
Leaving aside the obvious bad behavior of the adviser in the handling of its clients' redemption requests, there are two aspects of the enforcement matter that may be of broad relevance:
- The SEC has been bringing enforcement actions against broker-dealers for failing to keep required records, and particularly for communications on systems such as WhatsApp that do not facilitate recordkeeping.
- This is the first such action against an adviser, which may signal more to come. The failure of the firm to have adequate written procedures as to redemptions may likewise suggest that advisers should review their policies in this area.
Commentary
This enforcement matter provides some insight into the SEC's ongoing focus on records of communications. Here, the firm failed to enforce its policy limiting communications to platforms that preserve messages, and responded to violation of such policy in at least one instance by instructing the employee to delete the inappropriate text messages.
As a practical matter, it is nearly inevitable that communications off of firm approved systems will occur from time to time (i.e. a client texting an employee on their personal phone); firms should work to ensure that employees are sufficiently trained to make records of such communications and then move such conversations to approved systems. While it is challenging to see how firms can monitor iMessage, WhatsApp, Telegram and similar messaging applications on employees' personal devices in an appropriate manner, firms should take swift and meaningful action in response to any known violations of communications policies.