Private Fund Sponsor Failed to Disclose Inter-Fund Loans
A private fund sponsor and its principal agreed to pay over $500,000, hire an Independent Monitor, and notify clients that it has settled SEC charges that the firm arranged undocumented and undisclosed loans among its affiliated funds. The SEC faults the firm and its principal for using certain private funds it managed as a funding source when other funds had cash needs related to securities positions or margin. Although the loans were repaid, the SEC charges that the respondents did not adequately disclose the loans, document their terms, or obtain any client consent. The SEC also criticizes the firm for insufficient compliance policies and procedures and inadequate ADV disclosure.
OUR TAKE: Private fund firms that registered after Dodd-Frank cannot continue to run their firms as they did before registration. The Advisers Act strictly limits inter-fund transactions such as those described in this action. A fiduciary must ensure complete transparency and put every client’s interest before its own.