SEC Settles Charges Against Investment Adviser for Unlawful Cross Trades

The SEC recently settled charges against a registered investment adviser that engaged in hundreds of impermissible cross trades, including principal transactions, between its client accounts. The SEC Order found that the investment adviser violated Sections 17(a)(1) and 17(a)(2) of the 1940 Act, and Rule 38a-1 thereunder, and Sections 206(3) and 206(4) of the Advisers Act, and Rule 206(4)-7 thereunder. The investment adviser incorrectly believed that it did not need to comply with the relevant 1940 Act requirements because the cross trades were executed through an independent broker-dealer at market prices that the investment adviser believed were fair to each client. The investment adviser also effected the principal transactions without providing the required disclosures, and obtaining client consent, under the Advisers Act.

The Order was issued approximately one year after the SEC Office of Compliance Inspections and Examinations staff (Staff) published a Risk Alert on compliance issues the Staff observed related to principal trading and agency cross transactions. The Order and the Risk Alert highlight the SEC’s continuing focus on compliance issues related to inherent conflicts of interest of investment advisers and the importance of having policies, procedures and controls in place to identify and monitor cross trades and principal transactions.

The Order is available at: https://www.sec.gov/litigation/admin/2020/ia-5586.pdf

The Risk Alert is available at: https://www.sec.gov/files/OCIE%20Risk%20Alert%20-%20Principal%20and%20Agency%20Cross%20Trading.pdf