Registered Alts Manager Disciplined for Violating Investment Company Act
The SEC censured and fined an alternative mutual fund manager for technical violations of the Investment Company Act. The SEC charges the respondent, which managed a merger arbitrage strategy, for violating the custody rule (17(f)(5)) by allowing swaps counterparties to maintain cash collateral rather than maintain the cash with the fund’s custodian bank pursuant to a tripartite agreement. The SEC also alleges the adviser violated the distribution rule (12b-1(h)) for failing to follow procedures required to compensate distributing broker-dealers. The SEC added charges of violating the compliance rule (38a-1) for failing to implement effective policies and procedures.
OUR TAKE: Alternatives managers entering the registered fund space must understand and follow the Investment Company Act. Such managers should seek counsel from service providers (lawyers, auditors, compliance pros) with experience and expertise in the Act, as compliance is not intuitive, and the statute and its rules requires serious study and understanding.