Adviser Recommended Its Own Feeder Fund, Resulting in Losses and Suitability Charges
The SEC assessed over $650,000 in penalties against an investment adviser that recommended that clients invest in a proprietary feeder fund that exposed them to a risky third party fund.
The adviser created the feeder which included a 75 basis point management fee, which the adviser shared with selling reps. The underlying third party fund disclosed that it engaged in a speculative and volatile strategy, which ultimately resulted in significant losses. The SEC accuses the firm of failing to implement appropriate suitability policies, training, and supervisory reviews, thereby allowing its reps unfettered discretion to recommend the risky funds to those for whom they were not suitable. One of the reps was also suspended from the industry and ordered to pay a $100,000 fine.
This case is really about trying to justify inherent conflicts of interest when an adviser, who already receives an advisory fee, recommends proprietary funds where both the sponsor and its reps receive compensation. Sure, better procedures and supervision may have helped, but the real problem arose when the fund lost 35% in one month. The SEC has always frowned on fiduciaries recommending their own products on which they receive direct compensation.
Read SEC Order here.