The SEC has instituted proceedings against a hedge fund manager that allowed its primary distributor to dictate fund decisions in order to collect unauthorized and undisclosed fees.  According to the SEC, the fund manager feared losing the favor (and assets) of the broker-dealer that raised most of the assets for its funds.  As a result, it allowed the BD’s principal to make significant investment decisions and dictate to underlying portfolio companies.  Additionally, the fund manager steered investment banking and bridge loan origination business to the BD.  

OUR TAKE: Many small fund firms become beholden to one distribution source or channel.  When the distributor exerts influence over fund structure and decisions, firms must consider their fiduciary implications.