## Facts

- Structured Portfolio Management, L.L.C., SPM Jr., L.L.C., and SPM IV, L.L.C. (collectively, SPM) served as investment advisers to three hedge funds: Structured Servicing Holdings Master Fund, L.P. (SSH), Parmenides Master Fund, L.P. (Parmenides), and Aqueous Master Fund, L.P. (Aqueous).
- The funds traded mortgage-related instruments, and also used U.S. Treasury securities (including for hedging; for Aqueous, Treasuries became a principal focus).
- A single trader executed U.S. Treasury trades for Aqueous and also for SSH and Parmenides, often trading the same Treasury securities for all three funds, creating a trade-allocation conflict.
- An internal review found that when the funds traded the same Treasury security on the same day, Aqueous consistently received better executions (buying at lower prices and selling at higher prices) than SSH and Parmenides.
- The SEC found the allocation conflict was disclosed but not adequately controlled; SPM did not implement written procedures reasonably designed to detect and prevent improper allocations over the relevant period (February 2006 through February 2009).
- After concerns were raised, SPM temporarily restricted the trader from trading for SSH and Parmenides and made certain operational changes, but did not formalize a written allocation-control framework.
- Separately, Aqueous’s investor materials described a strategy focused on mortgage-related securities, but Aqueous gradually shifted to investing almost exclusively in Treasury securities while continuing to represent it was primarily invested in mortgage-related securities.
- The SEC instituted administrative cease-and-desist proceedings; respondents settled by consenting to findings and remedies without admitting or denying the findings (other than jurisdiction).

## Issues

1. Whether SPM violated Advisers Act § 206(4) and Rule 206(4)-7 by failing to adopt and implement written policies and procedures reasonably designed to prevent improper allocations arising from cross-fund trading conflicts.
2. Whether SPM violated Advisers Act § 206(4) and Rule 206(4)-7 by failing to adopt and implement written policies and procedures reasonably designed to prevent inaccurate or outdated disclosures about a fund’s investment strategy and portfolio composition.

## Decision

- The SEC found SPM violated Advisers Act § 206(4) and Rule 206(4)-7 by failing to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act.
- The violations were based on (1) inadequate controls addressing conflicts in Treasury trade allocations among the three advised funds and (2) inadequate controls to prevent inaccurate strategy disclosures for Aqueous as its holdings shifted.
- The SEC ordered SPM to cease and desist from further violations.
- The SEC imposed remedial sanctions, including a civil monetary penalty, and required compliance-related undertakings.

## Legal Principles

- Rule 206(4)-7 requires SEC-registered advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules, and to review them at least annually.
- A disclosed conflict of interest does not satisfy an adviser’s obligations if the adviser fails to implement written, enforced controls reasonably designed to detect and prevent conflicted conduct, including unfair trade allocations among clients or funds.
- Advisers must maintain compliance processes reasonably designed to ensure investor communications and offering materials remain accurate as a fund’s strategy and holdings change in a material way.
- Informal or ad hoc monitoring and operational adjustments may be insufficient where identified risks require a documented allocation methodology, supervision, and testing to prevent violations.

## Conclusion

The SEC concluded that SPM’s failure to implement written compliance procedures addressing cross-fund allocation conflicts and ensuring accurate strategy disclosures constituted violations of Advisers Act § 206(4) and Rule 206(4)-7, warranting a cease-and-desist order and remedial sanctions in a settled administrative proceeding.


In re Structured Portfolio Mgmt., L.L.C., Investment Advisers Act Release No. 3906 (SEC Aug. 28, 2014)