WEST PALM BEACH, FL (HedgeCo.Net) – For hedge fund managers and other investment advisers that either are, or soon may become subject to the registration provisions of the U.S. Investment AdvisersAct of 1940, and the examinations by the staff of the Securities and Exchange Commission (the \u00c3\u00af\u00c2\u00bf\u00c2\u00bdSEC\u00c3\u00af\u00c2\u00bf\u00c2\u00bd) that come with registration, a recent SEC administrative proceeding should serve as a warning thatadvisers must be careful about how they represent themselves to the public.<\/p>\n
On September 30, 2004, the SEC entered into an Order with a San Francisco based investment adviser stemming from allegations that the adviser misrepresented its assets under management and did not keep adequate books and records. The SEC alleged that Groh Asset Management and its principal officer (collectively, \u00c3\u00af\u00c2\u00bf\u00c2\u00bdGroh\u00c3\u00af\u00c2\u00bf\u00c2\u00bd) overstated Groh\u00c3\u00af\u00c2\u00bf\u00c2\u00bds assets under management to companies, such as Nelson Information, Callan Associates, Inc., Money Manager Review, Effron-PSN, and Checkfree Investment Services (formerly Mobius Group), which in turn disseminated the false information to the public. The SEC did not allege that Groh misrepresented its assets under management in official SEC filings, such as its Form ADV, but rather that it falsely filled out questionnaires and updates that were provided to third-party ranking publications and databases that are in the business of gathering, publishing, circulating, and distributing information about investment advisers to the public.<\/p>\n
According to the SEC Order, these were not simple rounding errors, nor an isolated incident. At various times, Groh submitted information or responses to questionnaires to third party ranking services indicating that Groh had as much as $180 million under management when the actual figure was closer to $30 million. The shocking part of the SEC allegations was not that the assets under management were so highly inflated, nor was it that Groh conveniently did not retain copies of the false and misleading questionnaires submitted to these third party ranking services. Certainly, if you are going to misrepresent your assets under management by six times, it would make sense to not keep the evidence. No, the most stunning aspect of the SEC settlement with Groh was that this adviser had been caught by the SEC engaging in the same fraudulent activity in 1997 by a routine examination and had been issued a deficiency letter essentially telling Groh to cut it out. But Groh continued the same behavior until at least February 2003, according to the SEC.<\/p>\n
Rather than shut Groh down completely, which certainly was an option in this type of case, the SEC imposed a fine of $45,000 on Groh which, given the recidivist nature of the offense, does not seem unnecessarily harsh. The Order also required Groh to hire an independent consultant to conduct a review of Groh\u00c3\u00af\u00c2\u00bf\u00c2\u00bds policies and procedures, implement all of the recommendations of the consultant, have the consultant submit its report to the SEC, and basically have the consultant stay involved in the business for up to five years. For a small investment adviser with $11 million under management, according to its most recently available Form ADV (not $180 million), the settlement will prove expensive and a real administrative headache.<\/p>\n
Interestingly enough, the SEC had nothing to say to the third party ranking services, some of which themselves are registered investment advisers, about the level of due diligence that might be appropriate when gathering and disseminating information about an adviser with a fiduciary duty to its clients.<\/p>\n
The takeaway here is that the SEC is fairly sensitive about an adviser providing materially false and misleading information to the public, whether it is done the old fashioned way, such as in the adviser’s own marketing materials, or in more creative ways, such as the Groh method. The SEC has periodically brought enforcement actions against advisers that inflate performance figures, misrepresent educational or professional experience, or otherwise commit a fraud on the public. For advisers that have operated without registration and have not been familiar with the nuances of the performance, recordkeeping, custody, principal transaction, and general compliance rules, it may be time to think about getting that way.<\/p>\n
Note:<\/p>\n
White & Case LLP represents hedge fund sponsors and advisers, prime brokers, and administrators through its 38 offices in 25 countries around the world. For further information on the White & Case hedge fund practice, contact:<\/p>\n
| \n Jay B. Gould <\/font><\/span> <\/p>\n White & Case LLP ~ San Francisco<\/font><\/span> <\/p>\n Three Embarcadero Center<\/font><\/span> <\/p>\n 22nd Floor<\/font><\/span> <\/p>\n San Francisco, CA 94111-3162<\/font><\/span> <\/p>\n Tel: (415) 544-1112 Fax: (415) 544-0202<\/font><\/span> <\/p>\n jgould@whitecase.com<\/font><\/span> <\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table><\/div>\n WEST PALM BEACH, FL (HedgeCo.Net) – For hedge fund managers and other investment advisers that either are, or soon may become subject to the registration provisions of the U.S. Investment AdvisersAct of 1940, and the examinations by the staff of […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-2774","post","type-post","status-publish","format-standard","hentry","category-hedgeco-news"],"_links":{"self":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/2774","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/comments?post=2774"}],"version-history":[{"count":0,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/2774\/revisions"}],"wp:attachment":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/media?parent=2774"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/categories?post=2774"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/tags?post=2774"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}} |