November 22, 2022

Investment Adviser Fined for Improper Principal Trades

An investment adviser settled SEC charges for engaging in numerous principal trades with clients without first making the necessary disclosures and obtaining the client's consent as required by IAA Section 206(3) ("Prohibited Transactions by Investment Advisers").

In the Order, the SEC found that the adviser engaged in principal trading by transacting through an account in which it had more than a 25 percent interest. The SEC found that the adviser also engaged in transactions between registered investment company ("RIC") accounts and other clients that were affiliated with a RIC "without complying with the statutory provisions governing cross trades involving RICs" or determining the availability of an applicable exemptive order or rule. As a result, the SEC found that the adviser caused certain of its clients to violate ICA Sections 17(a)(1) and 17(a)(2) ("Transactions of Certain Affiliated Persons and Underwriters"). In addition, the SEC found that the adviser failed to notify the full boards of directors for these RIC clients, preventing these boards from determining if cross-trades had been made in compliance with their respective RIC's procedures, as required under ICA Rule 17a-7 ("Exemption of Certain Purchase or Sale Transactions Between an Investment Company and Certain Affiliated Persons Thereof").

The SEC said that the adviser failed to maintain a written set of policies and procedures designed to prevent these infractions, thereby violating IAA Section 206(4) ("Prohibited Transactions by Investment Advisers") and IAA Rule 206(4)-7 ("Compliance Procedures and Practices"). In addition, the SEC said the adviser caused certain advisory clients to violate ICA Rule 38a-1 ("Compliance Procedures and Practices of Certain Investment Companies").

To settle the charges, the adviser agreed to (i) cease and desist, (ii) a censure and (iii) a civil monetary penalty of $500,000.

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