Adviser and Principals Will Pay Over $600,000 for Engaging In Principal Trades without Required Disclosure and Consent
An investment adviser and its two principals were ordered to pay over $600,000 in disgorgement, fines and interest for failing to obtain client consent for principal transactions with an affiliated broker-dealer. The firm was also ordered to retain an independent consultant and post the enforcement order on its website. The SEC alleges that the two principals maintained a significant ownership and commission interest in an affiliated broker that executed fixed income trades with bonds out of its inventory. The SEC charges that the adviser never disclosed the principal transactions or obtained the consent to every transaction as required by Section 206(3) of the Advisers Act. The SEC also charges that the firm violated the compliance rule (206(4)-7) by failing to implement compliance policies and procedures addressing principal transactions.
OUR TAKE: The obligation to obtain client consent to principal transaction and include relevant policies and procedures is included in “Compliance 101.” This is why firms need to hire a compliance officer with relevant experience.