Affiliated Firms Settle SEC Conflicts Cases

Two affiliated firms settled SEC enforcement actions for (i) inadequate disclosures to investors, (ii) breach of fiduciary duty, (iii) entering into prohibited joint transactions and principal trades and (iv) Regulation Best Interest failures. 

The SEC found that: 

• According to the first Order, the dually registered broker-dealer/investment adviser, through its registered representatives, recommended certain mutual fund products to its retail brokerage customers when materially less expensive ETF products that offer the same investment portfolio to investors were also available to these customers. The SEC found this conduct violated Exchange Act Rule 15l-1(a)(1) ("Regulation Best Interest").
• According to the second Order, the dually registered broker-dealer/investment adviser failed to disclose the financial incentive of certain of its financial advisors to recommend its own advisory program over others offered by the firm, that used third-party managers. The SEC found this conduct violated the Advisers Act Sections 206(2) and 206(4) ("Prohibited transactions by investment advisers") and Rule 206(4)-7 ("Compliance procedures and practices").
• According to the third Order, the dually registered broker-dealer/investment adviser provided misleading disclosures to customers investing in its "conduit" private funds, which pooled customer money to invest in private equity and hedge funds. The SEC found that these conduit funds later received shares of companies that went public. The SEC also found that an affiliate of the broker/dealer retained full discretion over when and how many of those shares to sell, contrary to the fund disclosures. The SEC determined that this approach exposed investors to market fluctuations and declining values for certain shares that the fund took months to sell and violated Securities Act Section 17(a)(2) and 17(a)(3) ("Fraudulent Interstate Transactions"). 
• According to the fourth Order, an affiliated registered investment adviser to three US money market mutual funds (and the delegated portfolio manager of an affiliated foreign money market fund), engaged in prohibited joint transactions involving these funds that advantaged the foreign fund over the US funds. The SEC found this conduct violated Investment Company Act Section 17(d) ("Transactions of certain affiliated persons and underwriters") and Rule 17d-1 ("Applications regarding joint enterprises or arrangements and certain profit-sharing plans"). 
• According to the fifth Order, the affiliated registered investment adviser engaged in prohibited principal trades involving commercial paper and other short-term fixed-income securities on behalf of its advisory clients. The SEC said the trades did not meet the required disclosures and approval conditions and found this conduct violated Investment Company Act Section 17(a)(1) and 17(b) ("Transactions of certain affiliated persons and underwriters") and Rule 38a-1 ("Compliance procedures and practices of certain investment companies") as well as Advisers Act Section 206(4) ("Prohibited transactions by investment advisers") and Rule 206(4)-7 ("Compliance procedures and practices").

Without admitting or denying the findings in the Orders, the two affiliates agreed to pay over $151 million in combined civil penalties and voluntary payments to investors to resolve four of the actions.