HEDGE FUND SPONSOR SANCTIONED FOR UNDISCLOSED FUND-TO-FUND CASH TRANSFERS
The SEC censured and fined a hedge fund sponsor and its operations manager for transferring cash from one fund it managed to another fund to meet margin calls. Although the fund sponsor claimed that the transfers were loans, no documentation existed. The SEC indicated that the transfers were not disclosed in the fund’s offering documents. The SEC charged the operations manager with aiding and abetting a violation of the Adviser Act’s antifraud rules. His employer was charged with failing to properly supervise the operations manager because it did not have any supervisory procedures outlining who could approve cash transfers and when transfers were permitted. The SEC noted that the funds were not domiciled in the US, none of the investors were US persons, and that the cash transfers were repaid with interest.
OUR TAKE: Fund sponsors should never commingle the assets of separate funds without specific disclosure and procedures. This action shows the willingness of the SEC to assert its jurisdiction over registered investment advisers using the broad reach of the anti-fraud rules even where no US investor is involved or harmed.