Adviser and Father-Daughter Duo Fined for Riskless Principal Trades
A dual registrant and its father-daughter principals were fined $200,000 and agreed to pay full restitution and interest for engaging in riskless principal transactions without providing disclosure and obtaining consent.
Over the course of three years, the respondents received a riskless principal spread on fixed income trades with its clients. In a clear violation of the Advisers Act, the respondents did not disclose to clients its interpositioning or obtain transaction-by-transaction consent from each client. The firm’s compliance manual required disclosure and consent for traditional principal transactions (inventory trades), but not riskless principal transactions. During the period of alleged violations, the Managing Principal (father) served as Chief Compliance Officer, and was then succeeded in the role by the Director of Operations (daughter).
The SEC recently warned advisers about the compliance obligations when engaging in any type of cross-trading or principal transactions. Perhaps, these dual-hat CCOs did not have the time to review the SEC’s warnings or did not fully understand the compliance requirements. Once again, the dual hat model results in an enforcement action in an area where a qualified and dedicated CCO would likely know and apply these very clear rules.
Read SEC Order here.