Investment Advisers, Misstatements and Conflicts
Investment advisers have a fiduciary duty to their clients under the statutes. This contrasts with the obligations of others such as corporate employees and even brokers and dealers. That duty is fundamental to the function of an investment advisory giving its role, duties and obligations. The failure to have communications vetted by compliance personnel prior to release in this context becomes critical as did undisclosed conflicts. The point is well illustrated by the recently filed, settled proceedings captioned, In the Matter of Mass Ave Global Inc., Adm. Proc. File No. 3-21949 (May 29, 2024).
Named as a respondent in this proceeding is MassAve, a New York City based exempt reporting adviser since May 2021. Respondent was listed as being the adviser to sixteen private funds, including one with over $1.1 billion in regulatory assets under management. On March 2, 2023, the adviser announced a decision to wind down all sixteen funds and terminate them. MassAve continues to manage the wind down. As of May 6, 2024, it had about $93 million regulatory assets under management.
The proceedings here center on a series of misleading statements and an undisclosed conflict of interest. The former involved statements about the holdings of the firm and its exposures as depicted in monthly tear sheets, summary portfolio snapshots and communications regarding the top ten largest positions of the firm.
A number of the misleading communications resulted from modifications made by Winston Mubai Feng, the firm’s co-founder, CEO and majority owner. The modified statements were used by other MassAve employees for purposes of inclusion in the Investor Communications. The information was not further reviewed by compliance employees prior to dissemination to investors.
The latter is based on a conflict issue. It stems from the non-disclosure of a conflict of interest arising from the operation of a separate hedge fund in China by MassAve’s other co-founder about which Mr. Feng, and thus the firm, had knowledge.
The dissemination of misleading information in investor communications resulted from not adopting and implementing policies and procedures reasonably designed to prevent inaccurate information in investor communications. The Order alleges violations of Advisers Act Sections 206(2) and 206(4), in addition to the pertinent rules.
To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the order and a censure. In addition, Respondent will pay a penalty of $350,000. See also In the Matter of Winston Mubai Feng, Adm. Proc. File No. 35207 (May 29, 2024)(proceeding naming as respondent the founder of the firm based largely on similar facts; resolved with the entry of a cease-and-desist order based on the same Sections and his suspension from the securities business and serving as an officer/director with the right to reapply after 12 months. Respondent will also pay a penalty of $250,000).