SEC charges firm for breaking fiduciary duty

The securities watchdog contends a GP didn’t acquire the necessary investor approval before carrying out a related party transaction.

Alternatives firm VERO Capital Management is squaring off against the Securities and Exchange Commission (SEC) after it allegedly failed to gain investor approval before making a related party transaction.

The SEC has commenced enforcement proceedings against VERO who used its fund to purchase notes from a VERO affiliate without providing notice or consent to the fund’s investors.

Section 206(3) of the Investment Advisers Act prohibits an investment adviser from “acting as a principal on its own account or acting as a broker for the sale to a client” unless it obtains the client’s consent to the transaction before completion.

According to the SEC, VERO did not obtain such consent, but, instead, relied on the approval of an investment committee comprised solely of VERO insiders and a notice in its financial statements. The SEC also accused VERO of illegally diverting funds.

VERO was unable to respond to a request for comment by press time.

“Private fund managers that became registered investment advisers because of Dodd-Frank can no longer make internal re-allocations without client consent, regardless of permissive language in the PPM or LPA,” said Todd Cipperman, founder of compliance consultants Cipperman Compliance Services, in a blog entry. “The Advisers Act makes the fund manager a fiduciary subject to all of the Advisers Act’s conflicts prohibitions.”

A public hearing to take evidence is set to take place next month before an Administrative Law Judge who will then issue a decision later in the year.