by T. GormanPosted on Posted in SECActions

Investment advisers have a fiduciary duty to their clients under the statutes. This contrasts with the obligations of others such as corporate employees and even brokers and dealers. That duty is fundamental to the function of an investment advisory giving its role, duties and obligations. The failure to have communications vetted by compliance personnel prior to release in this context becomes critical as did undisclosed conflicts. The point is well illustrated by the recently filed, settled proceedings captioned, In the Matter of Mass Ave Global Inc., Adm. Proc. File No. 3-21949 (May 29, 2024).

Named as a respondent in this proceeding is MassAve, a New York City based exempt reporting adviser since May 2021. Respondent was listed as being the adviser to sixteen private funds, including one with over $1.1 billion in regulatory assets under management. On March 2, 2023, the adviser announced a decision to wind down all sixteen funds and terminate them. MassAve continues to manage the wind down. As of May 6, 2024, it had about $93 million regulatory assets under management.

The proceedings here center on a series of misleading statements and an undisclosed conflict of interest. The former involved statements about the holdings of the firm and its exposures as depicted in monthly tear sheets, summary portfolio snapshots and communications regarding the top ten largest positions of the firm.

A number of the misleading communications resulted from modifications made by Winston Mubai Feng, the firm’s co-founder, CEO and majority owner. The modified statements were used by other MassAve employees for purposes of inclusion in the Investor Communications. The information was not further reviewed by compliance employees prior to dissemination to investors.

The latter is based on a conflict issue. It stems from the non-disclosure of a conflict of interest arising from the operation of a separate hedge fund in China by MassAve’s other co-founder about which Mr. Feng, and thus the firm, had knowledge.

The dissemination of misleading information in investor communications resulted from not adopting and implementing policies and procedures reasonably designed to prevent inaccurate information in investor communications. The Order alleges violations of Advisers Act Sections 206(2) and 206(4), in addition to the pertinent rules.

To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the order and a censure. In addition, Respondent will pay a penalty of $350,000. See also In the Matter of Winston Mubai Feng, Adm. Proc. File No. 35207 (May 29, 2024)(proceeding naming as respondent the founder of the firm based largely on similar facts; resolved with the entry of a cease-and-desist order based on the same Sections and his suspension from the securities business and serving as an officer/director with the right to reapply after 12 months. Respondent will also pay a penalty of $250,000).

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by T. GormanPosted on Posted in SECActions

What happens when inappropriate, improper or illegal conduct is discovered at your company? A range of choices immediately loom. They run from nothing, to self-reporting to the authorities, to covering it up. SEC Enforcement Director Gurbir S. Grewal recently addressed one option in remarks titled “The Five Principles of Effective Cooperation in SEC Investigations, May 23, 2024 (here).

Following a preface in which the Director tried to assure everyone that self-reporting is worthwhile, the Director detailed five principles for undertaking the task. They are:

The best cooperation starts early and well before the SEC gets involved, with self-policing.

Once you discover a possible violation, self-report without delay.

Don’t stop with the self-report. Remedies.

The type of cooperation that earns credit requires going above and beyond what’s legally required – more than simply complying with subpoenas without undue delay or gamesmanship.

Collaborate with Enforcement Staff early, often, and substantively.

There should be no doubt about the soundness of the five principles listed above. Starting early following the discovery of not just wrongful conduct but any actions that may be out of sync with the tone the company wants at the top and in the culture is virtually always the best approach – delay almost always means the conduct discovered begins to fade from memory, a prospect that may dull or ultimately dissuade any action.

Coupling immediate action to address the issue, and tying that approach to reporting it to those appropriate at the company and, if seeking cooperation credit, the SEC, while engaging in remediation helps ensure appropriate action and perhaps credit. Stated differently, this helps ensure that the culture of the company – hopefully a reflection of positive and beneficial tone at the top – continues to grow and thrive.

Likewise, immediately going the extra mile when not just ending unwanted actions or conduct, but reaching past that with extra steps, helps ensure that the overall tone, tenure and culture of the company continues to grow in an appropriate way.

Overall, the Director’s Five Principles are not just a code for self-reporting to the SEC but for helping safe-guard what may be a good, positive culture at the firm while improving it for the future. Thus, regardless of your view of self-reporting and trying to earn “cooperation credit” from the SEC – something some believe in while others remain skeptical about and some do not believe in — the five principles enumerated by the Director can help a company continue to grow and improve a positive culture. If that happens, with a bit of luck, there may never be a need to figure out if “self-reporting” has merit or not – your company will not need to try and earn “cooperation credit.” And that is where everyone wants to be.

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