## Facts

- Account Management Corporation (AMC) was an SEC-registered investment adviser with discretionary authority over client accounts.
- From January 1992 through June 1993, AMC obtained allocations in “hot” initial public offerings (IPOs) where demand exceeded available shares.
- AMC purchased shares in 34 hot IPOs and promptly sold them for profits in the aftermarket.
- AMC’s two principals controlled allocation of scarce IPO shares among AMC clients.
- The principals favored a small group of clients—most of whom were close friends of the principals—in deciding which accounts received IPO shares and in what amounts.
- The principals did not allocate the IPO opportunities using disclosed, objective standards, and did not adequately consider the appropriateness of the IPO investments for each eligible client account.
- AMC did not adequately disclose to clients the factors, criteria, or conflicts affecting how IPO shares would be allocated.

## Issues

1. Whether an investment adviser violates Investment Advisers Act § 206(2) by allocating scarce, profitable hot-IPO shares preferentially to favored clients and failing to disclose allocation criteria and related conflicts.
2. Whether failure to consider the appropriateness of hot-IPO allocations across eligible client accounts contributes to a § 206(2) violation.
3. Whether § 206(2) can be violated through negligent conduct and material nondisclosure, without proof of scienter or quantified client losses.

## Decision

- The SEC found that AMC and its principals violated § 206(2) of the Investment Advisers Act.
- The SEC determined that AMC’s pattern of preferential hot-IPO allocations to favored clients, combined with inadequate disclosure of allocation criteria and conflicts, constituted a practice that operated as a fraud or deceit on other clients.
- The SEC imposed administrative relief consistent with an Advisers Act enforcement disposition, including sanctions and remedial orders.

## Legal Principles

- Investment advisers owe fiduciary duties of loyalty and fair dealing to clients, including in allocating limited investment opportunities.
- Under § 206(2), an adviser may not engage in a practice or course of business that operates as a fraud or deceit upon clients; proof of scienter is not required.
- Preferential allocation of scarce, lucrative opportunities to selected clients can violate § 206(2) when not accompanied by full and fair disclosure and informed client consent.
- Material omissions about allocation methodologies, criteria, and conflicts of interest can constitute deceptive conduct under § 206(2).
- An adviser’s failure to exercise reasonable care in distributing investment opportunities—including failure to consider appropriateness for eligible accounts—can support a § 206(2) violation.

## Conclusion

The SEC held that AMC breached its fiduciary obligations and violated Advisers Act § 206(2) by systematically favoring friends of its principals in hot-IPO allocations while failing to disclose the allocation basis and related conflicts and by not applying reasonable, client-focused standards when distributing scarce IPO opportunities.


In re Account Mgmt. Corp., Investment Advisers Act Release No. 1529 (S.E.C. 1995)