Wednesday, May 13, 2009
BCCP Crew in the News: John Schrier, our Director of Regulatory Compliance!
APRIL 27, 2009, 11:33 A.M. ET
COMPLIANCE WATCH: Follow Through On Marketing Promises
By Suzanne Barlyn
A DOW JONES NEWSWIRES COLUMN
NEW YORK (Dow Jones)--Many investment advisers explain their due diligence strategies in marketing materials as a way to attract clients. But it's important to make good on those promises to avoid unwanted attention from regulators.
A recent settlement between the Hennessee Group LLC, a New York-based hedge fund consultant, and Charles J. Gradante, its principal, and the Securities Exchange Commission, is an example of the difficulties that may surface when regulators question whether advisers have followed through on diligence procedures explained in their marketing materials.
The SEC, in an administrative proceeding, charged that Hennessee and Gradante violated securities laws by not performing a "Five Level Due Diligence Process," which they advertised, before recommending that clients invest in the Bayou hedge funds that were later discovered to be a fraud. Gradante and Hennessee consented to the SEC's order, announced April 22, without admitting or denying guilt.
Hennessee, the SEC says, told clients its due-diligence process included a detailed review and analysis of the fund's investment portfolio, an on-site visit to a fund's offices to interview key personnel, and a background check on the fund's manager. But Hennessee breached its fiduciary duty and materially misled clients, the SEC says, by not performing the portfolio analysis or verifying conflicting statements about the identity of Bayou's auditor.
Nearly 40 Hennessee clients collectively lost more than $56 million in the Bayou scam, according to the SEC.
The settlement requires Hennessee to adopt policies that ensure its client disclosures about hedge fund selection and monitoring are adequate. Hennessee and Gradante also agreed as part of the settlement to pay the SEC a $100,000 fine and $714,644 for the return of profits.
Peter D. Greene, a hedge fund attorney in New York, says advisers, as a result of the settlement, should review their written compliance procedures and marketing materials. "[They] should take a look at the policies on their shelves and ask, 'Are we doing all these things?'" he says. If not, then modify them, he says, "so they more accurately mirror reality."
Compliance professionals should also review marketing materials and written procedures with people who work on the business side of an investment adviser or brokerage, says John Schrier, an asset management and tax lawyer in New York.
A portfolio manager and trader, for example, are often best able to verify whether a written trading strategy is described accurately, he says. The extra steps will likely improve an adviser's ability to follow written procedures, and to minimize future legal problems with investors and regulators.
(Suzanne Barlyn writes Compliance Watch, a column that focuses on compliance and regulatory issues affecting financial advisers. She can be reached at 201-938-4546 or by email at
suzanne.barlyn@dowjones.com.)
Article - WSJ.com http://online.wsj.com/article_email/BT-CO-20090427-711649-kIyVDA...
1 of 2 4/27/2009 12:05 PM
COMPLIANCE WATCH: Follow Through On Marketing Promises
By Suzanne Barlyn
A DOW JONES NEWSWIRES COLUMN
NEW YORK (Dow Jones)--Many investment advisers explain their due diligence strategies in marketing materials as a way to attract clients. But it's important to make good on those promises to avoid unwanted attention from regulators.
A recent settlement between the Hennessee Group LLC, a New York-based hedge fund consultant, and Charles J. Gradante, its principal, and the Securities Exchange Commission, is an example of the difficulties that may surface when regulators question whether advisers have followed through on diligence procedures explained in their marketing materials.
The SEC, in an administrative proceeding, charged that Hennessee and Gradante violated securities laws by not performing a "Five Level Due Diligence Process," which they advertised, before recommending that clients invest in the Bayou hedge funds that were later discovered to be a fraud. Gradante and Hennessee consented to the SEC's order, announced April 22, without admitting or denying guilt.
Hennessee, the SEC says, told clients its due-diligence process included a detailed review and analysis of the fund's investment portfolio, an on-site visit to a fund's offices to interview key personnel, and a background check on the fund's manager. But Hennessee breached its fiduciary duty and materially misled clients, the SEC says, by not performing the portfolio analysis or verifying conflicting statements about the identity of Bayou's auditor.
Nearly 40 Hennessee clients collectively lost more than $56 million in the Bayou scam, according to the SEC.
The settlement requires Hennessee to adopt policies that ensure its client disclosures about hedge fund selection and monitoring are adequate. Hennessee and Gradante also agreed as part of the settlement to pay the SEC a $100,000 fine and $714,644 for the return of profits.
Peter D. Greene, a hedge fund attorney in New York, says advisers, as a result of the settlement, should review their written compliance procedures and marketing materials. "[They] should take a look at the policies on their shelves and ask, 'Are we doing all these things?'" he says. If not, then modify them, he says, "so they more accurately mirror reality."
Compliance professionals should also review marketing materials and written procedures with people who work on the business side of an investment adviser or brokerage, says John Schrier, an asset management and tax lawyer in New York.
A portfolio manager and trader, for example, are often best able to verify whether a written trading strategy is described accurately, he says. The extra steps will likely improve an adviser's ability to follow written procedures, and to minimize future legal problems with investors and regulators.
(Suzanne Barlyn writes Compliance Watch, a column that focuses on compliance and regulatory issues affecting financial advisers. She can be reached at 201-938-4546 or by email at
suzanne.barlyn@dowjones.com.)
Article - WSJ.com http://online.wsj.com/article_email/BT-CO-20090427-711649-kIyVDA...
1 of 2 4/27/2009 12:05 PM
Labels: adviser, Bayou, due diligence, hedge fund, Hennessee, marketing, sec
