Practice What You Preach – Adherence to Policies & Procedures

The Securities and Exchange Commission (“SEC”) recently ordered a cease-and-desist against hedge fund adviser Agamas Capital Management, LP (“Agamas”).  The SEC alleged, among other things, that Agamas failed to adopt and implement written compliance policies and procedures as required by Section 206(4) of the Advisers Act and Rule 206(4)-7.  The rule requires investment advisory firms to develop a set of policies and procedures reasonably designed to “prevent violations from occurring, detect violations that have occurred, and correct promptly any violations that have occurred.”  Although Agamas had policies and procedures in place, they failed to ensure investor disclosures were accurate, and failed to prevent improper discretionary valuation of securities.

In 2004, Agamas launched the Agamas Continuum Master Fund, Ltd. (the “Continuum Fund”) which grew to $900 million in assets under management. It also took on a separately managed account in 2007. The Continuum Fund traded in securities whose prices were not widely quoted by an established service.  In order to price these securities, Agamas adopted a valuation procedure, which they disclosed in their fund’s offering materials to potential investors.  However, between 2007-2008, Agamas employed a discretionary valuation process that was not fully documented, nor modified and updated within its written procedures. Agamas also failed to ensure these valuation practices were described accurately in its disclosure documents to investors. The SEC found that Agamas willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-7, whereupon Agamas was censured and fined $250,000.00.

Although Agamas had comprehensive written policies and procedures, they were not tailored to the firm’s actual practices, nor were such practices adequately disclosed.  For further information on this topic, please contact us at info@jackolg.com or (619) 298-2880.

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