The SEC recently announced charges against two advisory firms and certain of their executives for violations involving improper principal transactions and custody practices according to InvestmentNews.
Specifically, the SEC stated that Parallax Investments and Tri-Star Advisors engaged in thousands of improper principal transactions between advisory client accounts and their affiliated brokerage firms, without obtaining client consent or making required disclosures. As a result, the SEC believes that Parallax and Tri-Star deprived clients of knowing in advance that their advisers stood to benefit by running the trades through an affiliated account. The owner and two representatives used the firm’s corporate accounts to purchase mortgage-backed securities and then transferred the bonds to their clients’ accounts, all the while collecting incentive fees totaling more than $2M on the transactions.
In addition, Parallax was charged with violations of the custody rule for failing to obtain a proper fund audit and deliver timely financial statements to investors in a private fund for which they acted as the adviser. Although Parallax obtained an audit of the fund in 2010, the SEC alleged that the firm knowingly failed to retain a PCAOB-registered auditor and failed to deliver the financial statements on time. Moreover, the SEC charged the firm with failing to adopt policies and procedures designed to prevent violations of the Investment Advisers Act of 1940 as well as failing to conduct an annual review of same. It is difficult to tell based on the available information whether these separate charges would have been brought alone if there had not been allegations of wrongdoing related to the principal transactions as well.
This case comes on the heels of several others brought under the chairmanship of Mary Jo White. However, it is still too early to tell whether we will see the SEC’s recent enforcement zeal wax or wane as we move into the new year.
A link to the SEC order can be found at: http://www.sec.gov/litigation/admin/2013/34-70944.pdf.