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The BD/IA Regulator Providing securities regulatory, enforcement and litigation trends for broker-dealers, investment advisers and investment funds

SEC Charges Private Fund Administrator with “Gatekeeper Failures”

Posted in SEC Enforcement

Add fund administrators to the list of service providers the SEC expects to act as “gatekeepers.” In two separate settled actions last week, the SEC found that a private fund administrator “caused” the managers’ unregistered private equity funds to violate the Investment Advisers Act.

According to the SEC, the administrator missed or ignored clear “red flag” indications of fraud while carrying out its responsibilities to keep records and prepare financial statements and investor account statements.

The SEC staff said that fund administrators are “responsible for ensuring that fund records provide accurate information about the value and existence of fund assets.” The staff found that the failure of the administrator in these cases to do so “essentially enabled the schemes to persist . . . until the SEC stepped in.”  The SEC found that the administrator’s failure to take action on the red flags presented by the managers’ actions was actionable, notwithstanding that fund administrators are not registered with the SEC.

The administrator agreed to the settlement without admitting or denying the charges and paid disgorgement, penalties, and interest of approximately $350,000.

Our take

It appears that it is not enough for policies and procedures to simply address the operational functions of administration contracts.  Administrators must ensure that they have implemented compliance and supervisory structures that provide a structure for raising concerns about client accounts.  Moreover, investment advisers should ensure that their due diligence processes question whether administrators have appropriate policies in place and understand how they work.