SEC Argues that Solicitors Must Perform Certain Services to Avoid Prosecution

In a lawsuit filed against the solicitor for several hedge funds, the SEC has alleged that the solicitor aided and abetted securities laws violations because it did not perform “bona fide finding, placement or other services” and assisted in hiding the true nature of the payments as an undisclosed kickback arrangement. The suit was brought in connection with an alleged pay-to-play scheme to manage assets of the New York Retirement Fund. The SEC has alleged that New York’s Deputy Comptroller conspired with a political consultant to funnel funds to the consultant by requiring hedge fund managers to pay solicitation fees to the consultant as a quid pro quo to manage public assets. The SEC has alleged that any disclosures to the investment committee were “opaque” in that they hid the true recipient and did not describe the quid pro quo relationship. In its complaint, the SEC argues that the solicitor did not perform legitimate placement services such as the identification and introduction of clients to potential investors, assisting the client to solicit investors, and performing other services such as crafting marketing materials and presentations.

OUR TAKE: In its complaint, the SEC essentially expands the obligations imposed on solicitors. The SEC seems to have created a new requirement that solicitors perform some list of “legitimate” services that entitle solicitors to receive compensation. As a consequence, we would recommend that solicitors detail the services they perform in any disclosure given to investors.

http://www.sec.gov/litigation/complaints/2009/comp20963.pdf