SEC Forces RIA Principal to Divest Ownership Interest
The principal of a registered investment adviser and fund manager was fined, barred from the industry, and forced to divest his equity interest for making material misrepresentations and engaging in unlawful principal transactions.
The SEC accuses the respondent, the controlling equity holder in the adviser, of selling the firm’s underlying hedge fund with a PPM that did not represent the fund’s risky trading strategy. The SEC also accuses the firm and the principal with engaging in hundreds of principal transactions with clients without obtaining providing the required disclosures and obtaining the necessary consents. The firm also recommended unsuitable leveraged ETFs. The SEC faults the principal, who also served as the firm’s Chief Compliance Officer, with neglecting his obligations to adopt and implement policies and procedures.
Firm owners beware that the SEC can force you to divest your equity interest in a regulated entity as part of an industry bar. There are several other regulatory lessons from this case: (i) a C-suite executive should not dual-hat as the Chief Compliance Officer; (ii) don’t use a PPM with boilerplate investment objective and risk factor language; and (iii) don’t engage in principal transactions with clients.
Read SEC order here.