SEC Fines Private Fund Adviser for Hiding Truth About Trading Resources and SEC Settles with Large Pricing Vendor for Inadequate Valuation Policies and Procedures: Lessons Learned and Worth Reading, Watching & Hearing for January 2021


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SEC Fines Investment Adviser $170 Million for Multiple Disclosure Failures. UK-based investment adviser BlueCrest Capital Management Limited (BlueCrest) recently agreed to return $170 million to former investors to settle charges levied by the SEC involving disclosure failures, material misstatements, and misleading omissions. The SEC found that BlueCrest quietly transferred its top traders from its flagship client fund, BlueCrest Capital International (BCI), to an internal fund and left trading for the client fund in the hands of a trading algorithm that was set up to replicate some of the trading activity of BlueCrest’s live traders. Unfortunately for BCI investors, the algorithm, by and large, underperformed and resulted in inferior returns.

According to the SEC’s findings, BlueCrest failed to disclose to its investors and prospective investors the existence of the internal fund and the change in trading operations for BCI for more than four years. It also failed to disclose material facts about the trading algorithm to BCI’s independent directors. In fact, BlueCrest continued to promote its live traders’ talent as though they remained with BCI.

The lesson here is simple yet impactful. An adviser is obligated to make accurate disclosures to its existing and prospective investors. As a result of BlueCrest’s failure to act in the best interest of its investors and instead prioritize its own internal capital, the SEC determined that BlueCrest “willfully violated” antifraud provisions of the Securities Act of 1933 and Advisers Act of 1940, as well as the Advisers Act’s compliance rule. Contributed by Jennifer L. Cagadas, Compliance Consultant.

Valuation Vendor Nailed for Inadequate P&P. The SEC’s new Complex Financial Instruments Unit brought a case against ICE Data Pricing & Reference Data LLC (“ICE”), a global pricing service and investment adviser, for failing to have policies and procedures to assess the reliability of quotes received from market participants. From 2015 through September 2020, ICE delivered prices for over 40,000 fixed-income securities based on single-broker quotes. The SEC found ICE lacked sufficient policies and procedures and quality controls to address the risk that these prices would not reasonably reflect the value of the securities. Inconsistent application of ICE’s existing procedures impaired its ability to determine the reliability of those quotes, resulting in inaccurate prices being delivered to clients. Although using a third-party vendor can lend independence to the valuation process, advisers should perform initial due diligence and oversight to ensure the vendors have a sound and reliable valuation process. Contributed by Jaqueline M. Hummel, Partner and Managing Director.

Worth Reading, Watching and Hearing

Photo Credit: Photo by Özgür Öztürk on Unsplash.

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