Fund Adviser to Pay Over $3.3 Million for Failing to Oversee Sub-Adviser
The investment adviser to a register fund agreed to pay over $3.3 Million in disgorgement and penalties for failing to properly supervise an unaffiliated sub-adviser. The SEC charges that the sub-adviser never performed the services that both the sub-adviser and the respondent represented to the Board in the annual 15(c) contract renewal process. The respondent agreed to repay the entire $1.8 Million in fees paid to the sub-adviser over a 10-year period and pay another $1.5 Million in penalties. The SEC alleges that the respondent did not have oversight procedures including verifying services or conducing on-site due diligence reviews. As part of the settlement, the respondent agreed to certify each quarter that every unaffiliated service provider actually performs the services described and obtain a similar certification from the service providers. The SEC charges violations of Section 15(c) of the 1940 Act as well as Rule 206(4)-7 of the Advisers Act for failing to adopt reasonable policies and procedures. The SEC noted that the Board relied on the representations provided by both the respondent and the sub-adviser in annually approving the contract.
OUR TAKE: Advisers that utilize sub-advisers must ensure adequate supervision and due diligence as part of their oversight and compliance responsibilities. Boards should be asking advisers about their oversight procedures.