On March 8, 2013, the SEC announced the settlement of charges stemming from a private fund adviser’s alleged retention of a solicitor that was not properly registered as a broker. The SEC action involved a holding company that controls affiliated investment advisers that manage private funds (the “Adviser”), the Adviser’s former Senior Managing Partner (the “former executive”), who was in charge of capital raising efforts for the private funds managed by the Adviser, and an independent consultant retained by the Adviser, who was not a registered broker or affiliated with one and who the SEC alleged improperly solicited more than $500 million in capital commitments for the private funds managed by the Adviser. According to the SEC, from 2008 to 2011, the independent consultant actively solicited investors for the private funds managed by the Adviser and was paid a percentage of the capital committed by investors sourced by the independent consultant. The SEC alleged that the independent consultant solicited potential investors by (1) sending to potential investors private placement memoranda, subscription documents and due diligence materials that were provided to the consultant by the former executive or other personnel of the Adviser, (2) encouraging potential investors to make portfolio reallocations to enable such investors to invest in the private funds managed by the Adviser, (3) providing his analysis of the Adviser’s strategy and track record and (4) providing potential investors with confidential information related to the private funds (including current and potential investors’ identities and their capital commitments).
According to the SEC, the former executive ignored red flags that indicated that the independent consultant’s solicitation efforts went beyond the consultant’s intended role as a supposed “finder.” In addition, the SEC alleged that the Adviser “failed to adequately oversee [the independent consultant’s] activities” by giving the consultant access to fund documents and reimbursing the consultant for expenses associated with his efforts (such as travel and entertainment expenses) that should have indicated to the Adviser that the consultant had substantial (and improper) contact with potential investors.
Based on such conduct, the SEC found that the independent consultant willfully violated Section 15(a) of the Exchange Act, which “requires persons engaged in the business of effecting transactions in securities to be registered as a broker or dealer or associated with a registered broker or dealer.” The SEC also found that the former executive willfully aided and abetted the independent consultant’s violations and that each of the former executive and the Adviser caused the independent consultant’s violations.
Without admitting or denying the SEC’s findings, the Adviser and the former executive agreed to pay civil penalties of $375,000 and $75,000, respectively, and to cease and desist from further violation of Section 15(a) of the Exchange Act. In addition, according to the SEC, the former executive was suspended from acting in a supervisory capacity of an investment adviser or other securities market participant for nine months and the independent consultant was barred from the securities industry. According to the SEC, in accepting the Adviser’s settlement offer, the SEC considered that, subsequent to the alleged conduct, the Adviser changed its policies and procedures so that third parties retained by the Adviser as a finder or marketer are required to be a registered broker (or affiliated with a registered broker).