The SEC’s enforcement action against Lone Star Management shows how important compliance with the Advisers Act can be. The action, taken in February, was an “Order Instituting Administrative and Cease and Desist Proceedings” against both the fund manager and Jeffrey Eberwein, the founder, sole managing member and CEO. The order was issued in response to violations of the Investment Advisers Act of 1940 related to cross trades.
Over a two-year period, Lone Star Management effected nineteen cross trades between funds managed by the firm and two cross trades between a fund managed by the firm and a separately managed account for which Lone Star Management served as the investment adviser.
The twenty-one trades were made on a principal basis because Eberwein owned 35% of funds involved in each of the trades. Lone Star Management did not disclose in writing, as required in Section 206(3) of the Advisers Act, that it engaged in these transactions on a principal basis and did not obtain client consent before completion of each transaction. It’s important to note the SEC did not allege any client harm as a result of the transactions.
The SEC further added a violation of Section 206(4) and Rule 206(4)-7 stating Lone Star Management failed to implement written policies and procedures reasonably designed to prevent violations of the Advisers Act.
Lone Star Management was ordered to pay a penalty of $100,000 and Eberwein a penalty of $25,000.
The order underscores the importance of:
- Compliance with the Adviser’s Act as an exempt reporting adviser and a registered investment adviser.
- Understanding the differences in disclosure requirements under Section 206(3) of the Advisers Act.
- Implementing written policies and procedures.
How Bovill can help
The SEC examines about one-sixth of all registered investment advisers each year. Regulatory examinations are driven by various factors, such as emerging risks and trends, and responses to tips, complaints and referrals.
An examination involves a deep and thorough review of your operations, compliance arrangements and recordkeeping, so it’s advisable to be prepared for a visit. We can help you review your policies and procedures, and our SEC mock exams make sure you’re prepared for the real thing.