The SEC fined and censured a private fund manager and its principal for engaging in unlawful interfund cross trades. The firm’s founder/CEO owned more than 35% of one of the funds, so that multiple trades between the fund and other funds and SMAs advised by the fund manager triggered principal trading rules that require disclosure and client consent. The trades occurred during a period when the fund manager was an exempt reporting adviser and later when it registered with the SEC. The respondents are also charged with failing to adopt and implement reasonable compliance policies and procedures.
For those otherwise uninformed about the regulatory requirements, a principal trade between an adviser and its client (including a client fund) requires consent of all clients involved. The SEC makes clear in this case that the 35% ownership threshold triggers the principal trading rules. Also, the SEC will attack principal trading even by exempt reporting advisers.