Fund Manager Failed to Disclose Investments into Affiliate Fund

 

The SEC censured and fined a private fund manager for failing to disclose that one of its funds invested in an affiliate fund formed to help grow the manager’s business by acquiring other advisers.  Although the respondent ultimately made disclosure through the fund’s financial statements, the audited financials were delivered 9 months after they were required to be delivered pursuant to the Advisers Act’s custody rule (206(4)-2).  Also, the firm failed to retain an auditor subject to PCAOB inspection, as required by the Advisers Act.   The SEC noted that advisory clients would not have paid any fees had they invested directly in the acquisition fund rather than through the fund in which they intended to invest, which was focused on foreign currencies.

OUR TAKE: Failure to disclose cross-transactions between affiliate funds will not go undetected.  Eventually, the fund manager must deliver audited financial statements, which will require disclosure.  The Advisers Act requires advance disclosure (and consent) of conflicts transactions.  There is no win in kicking the disclosure down the road until financials are completed.