Is an "Ask" a Violation of the Advisers Act? Yes, it can be a violation to "put in a good word" for one of your family members. On January 5, 2023, the Securities and Exchange Commission (the SEC) entered into an Offer of Settlement (the Settlement) involving a former portfolio manager of a lending fund (the portfolio manager) at a well-known investment adviser (the Firm) because the portfolio manager caused a portfolio company to give a family member an audition for a role in a movie. See here.
The Result: The former portfolio manager was terminated by the Firm in 2020, censured by the SEC, and fined $250,000 effective with the Settlement.
Rationale: Having seemingly prevailed upon a Portfolio Company to assist his daughter with employment opportunities in the film industry, the portfolio manager-father allegedly failed to disclose as much to his Firm when recommending investing in the Portfolio Company, violating Section 206(2) of the Advisers Act, which prohibits "any transaction, practice or course of business which operates as a fraud or deceit upon any client."
Interactions Prior to Investment: The portfolio manager's interest in investing the client's assets, in what would be the Portfolio Company, occurred concurrently with requests that the future head of the Portfolio Company (the Executive) assist his daughter with career opportunities in the film industry. The portfolio manager brought his daughter to meetings with professionals of the future Portfolio Company in 2014, prior to any investment of client assets, where his daughter's career was discussed. Though no opportunities materialized from this meeting, the Executive created a relationship with the portfolio manager and his daughter. The portfolio manager brought his daughter to a subsequent meeting with the Executive the following year, where the Executive claimed to have influence over casting decisions in films. The Executive also sent screenplays to the portfolio manager's daughter. The Executive also offered to fly the portfolio manager's daughter to the Cannes Film Festival, and the portfolio manager and the Executive spoke about a potential internship at the Portfolio Company for his daughter.
The Investment: Following this series of interactions and meetings, the portfolio manager was primarily responsible for the Firm's investment in the Portfolio Company in 2015. Additionally, the portfolio manager recommended additional financings of the Portfolio Company in 2017.
Continued Conflict: In 2018, the portfolio manager's daughter requested contact information to reach out to senior members of the Portfolio Company for networking opportunities. A senior executive of the Portfolio Company met with her, and she received a part in a film as to which the Portfolio Company had distribution rights. Following this, in 2019, the Executive informed the Firm that the Portfolio Company needed the Firm to finance the expenses of the film the portfolio manager's daughter was given a role in. The portfolio manager recommended that an additional $10 million funding be given to the Portfolio Company to pay for the expenses of the film. The Portfolio Company failed to repay the loan in May 2019 when it was due.
Practice Note:The SEC takes quid pro quo cases very seriously. Perhaps the facts in this case might be read narrowly to imply that the Portfolio Company received its funding because it facilitated the employment of the daughter. There is a risk in reading an enforcement order too narrowly. Perhaps, it takes nothing out of the ordinary to incur penalties, censures and even worse. In this case, arguably the portfolio manager was simply advocating for and trying to help his child break into the film industry. When acting as an Advisers Act fiduciary, however, sometimes commercially reasonable behavior can be a violation of fiduciary duty. One must be particularly vigilant for any appearance of impropriety, conflicts of interest, and instances of potential quid pro quo that could involve client money.
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