Adviser Who Received Product Compensation Should Have Registered as BD
The SEC has commenced enforcement proceedings against a registered investment adviser for investing his client’s assets in securities that resulted in undisclosed compensation being paid to the adviser. The SEC alleges that the adviser moved a substantial portion of his client’s assets, which had been invested in blue chips and municipal securities, in promissory notes issued by companies controlled by an undisclosed individual. The SEC charges that the adviser received $1.75 Million in cash and 500,000 shares of a private company in exchange. In addition to charging the adviser with securities fraud and breach of fiduciary duty, the SEC charges that the adviser failed to register as a broker-dealer and violated Section 206(3) of the Adviser’s Act by acting as a broker in client transactions. The U.S. Attorney has also brought criminal charges.
OUR TAKE: The SEC has been very active in ferreting out situations where an adviser fails to disclose product compensation. One additional wrinkle here is the SEC charging that such product compensation is really transaction-based, thereby triggering broker-dealer registration obligations.