TLDR:
Investment adviser fined $1.4 million by SEC for not disclosing conflict of interest in SPACs; adviser’s personnel sponsored two SPACs while investing client funds, resulting in potential conflicts of interest and multiple suspect investment decisions.
Ladies and gentlemen, gather ’round. I’ve got a story that’ll make your monocles pop and give you something to discuss at your next wine tasting. The Securities and Exchange Commission (SEC) recently walloped New York-based investment adviser RTW Investments LP with a $1.4 million fine for something as innocent as not disclosing a conflict of interest in a special purpose acquisition company (SPAC). Oh, the humanity!
You see, an investment adviser representative sponsored not one, but two separate SPACs while simultaneously investing client funds in these SPACs. The SEC, being the fun police that they are, decided this little arrangement was a conflict of interest requiring disclosure. Apparently, honesty is still the best policy when it comes to other people’s money.
The SEC claimed that the Investment Adviser violated the Investment Advisers Act of 1940 and the Securities Exchange Act of 1934 by not disclosing material conflicts of interest to investors, and by neglecting to implement controls to prevent such conflicts from arising. Talk about taking the fun out of the investment game, am I right?
From December 2018 through May 2020, the Investment Adviser formed two SPACs and divvied up their founder shares accordingly. The Investment Adviser’s supervised persons acquired roughly one third of the founder shares of each SPAC, while the Investment Adviser’s funds acquired the remaining shares. The SEC alleged that this arrangement allowed the Investment Adviser and its personnel to profit from any completed transactions by the SPACs, even if such transactions were detrimental to the SPACs’ common shareholders. How cheeky!
As if that wasn’t enough, the SEC pointed to multiple investment decisions that might have been influenced by these conflicts of interest. For instance, one of the Investment Adviser’s funds made a $25 million bridge financing investment to one of the SPAC’s target companies. Meanwhile, another fund from the Investment Adviser allegedly purchased $9.2 million of common stock in one of the SPACs shortly before its shareholders voted on a proposed business combination. According to the SEC, these instances showed that the Investment Adviser’s personnel had conflicts of interest that could affect their decisions regarding client investments and the scope of those investments.
But wait, there’s more! The SEC also claimed that the Investment Adviser failed to adopt and implement written compliance policies and procedures to prevent these conflicts from arising. It seems someone forgot to read the “How to Be a Responsible Investment Adviser 101” handbook.
The Investment Adviser, for their part, neither admitted nor denied the allegations in the SEC’s order. The SEC decided not to impose any penalties beyond the $1.4 million fine. This hefty sum should serve as a stern warning to other investment advisers: keep your conflicts of interest under wraps, or the SEC will come knocking.
So, dear readers, let this story be a reminder that when dealing with conflicts of interest, transparency and disclosure are key. We trust our investment advisers to act in our best interests, and any failure to do so can result in serious consequences. With any luck, this tale will encourage all those in the financial world to maintain the highest standards of transparency with their clients. And with that, I bid you adieu and leave you to ponder the ever-exciting world of investment management.