Adviser’s Insider Loans Not Permissible Despite Lawyer’s Advice

A private fund manager was censured, fined, and ordered to hire an Independent Consultant in connection with undisclosed and unapproved loans he took from the fund.  The adviser arranged loans with the fund, rather than purchase securities, as a way to receive distributions.  Although his lawyer advised that the loans were permissible, the SEC faults the adviser for not obtaining investor consent and for disclosing the loans after they were made.  Additionally, the SEC faults the adviser for failing to explain the inherent conflicts of interest that the loans created.

OUR TAKE: A lawyer’s opinion is not a “get out of jail free” card.  If you violate your fiduciary obligations under the Advisers Act, the SEC will hold you accountable.  That is why it is important to implement a legitimate compliance program that avoids the regulatory gray areas.