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Compliance as a Clue to Potential Fund Failure and Your Financial Well-Being

SEC Takes Action Against Aria Partners GP, LLC
Thursday, December 13, 2018


According to Hedge Fund Research (HFR), a massive data analytics company covering the private fund industry, in 2017, 735 funds were launched, and 784 funds were liquidated. Hedge funds are supposed to be run by the best and brightest shining on Wall Street so how can that be possible? There are many reasons why that are beyond the scope of this article, but if you are seeking a fund that stays open for a sufficient amount of time, doing your research and locating one with a culture of compliance may be helpful.

In August 2018, the SEC instituted administrative and cease-and-desist proceedings pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 against Aria Partners GP, LLC (“Aria”).  Aria was an SEC-registered investment adviser for over 15 years and served as an adviser to several private funds. Aria neglected its compliance function, and like many before them, Aria was finally caught.

While there is no specific, tailor-made design, mandated by federal or state securities laws, compliance programs must be designed appropriately for chosen advisory models. Aria, as a general partner to private funds, had obligations to its investors. Because Aria failed to their obligation to provide complete information regarding redemptions to some of the fund’s investors, those investors incurred significantly more losses than investor’s that were aware of potentially more advantageous redemption options.

Specifically, Aria allowed full redemptions for some investors with only 60 days notice while other investors in the fund were required to provide 90 days notice. Aria failed to disclose the different procedures to the investors in a clear and reasonable manner and had no written policies or procedures in place to ensure Aria personnel performed the redemptions properly for all fund investors.

To make matters worse, Aria also neglected more common requirements such as annual audits, inaccurate statements regarding assets under management, and falsely renewed registration with the SEC after they were no longer qualified to register as an investment adviser at the federal level. Aria filed ADV Parts 1 and 2AB containing omissions and inaccurate information, which again, showcased their lax attitude toward compliance. Instead, Aria unreasonably relied on 3rd parties to discover the issues instead of detecting the problems themselves.

In March 2017 Aria terminated its status as an SEC-registered adviser. However, the order this August was still entered since termination of SEC registration status does not mean firms can no longer be held responsible. Investment advisory firms cannot simply operate recklessly and then avoid responsibility by just closing their doors.

The lesson to be learned from Aria’s story is that so much more should go into an investment decision – especially in alternative investments like private funds – than simply being wowed by large historical returns, overcomplicated quantitative models, or so-called famous money managers. An investor’s due diligence should include a deep look into the compliance programs at these private funds. These funds should be proud to show you that they have and follow written rules and procedures and that those rules and procedures make their fund a better place for your money. After all, if the fund manager doesn’t value compliance, how much does the fund manager really value your money and your life?

The SEC order against Aria can be found here.

Red Oak can help you understand the world of compliance and how we can help make you a more informed investor or firm investing other’s hard-earned money. Learn to acquire clients and avoid losing clients by instilling a culture of compliance.

For more information about Red Oak Compliance software and services solutions, partnership and/or integration opportunities or to schedule a demonstration, please visit us online, email us sales@redoakcompliance.com or give us a call at 888-302-4594.



About Red Oak Compliance Solutions

Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

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