The One With a Private Fund End-Around

Bradway Financial provides traditional investment advice. More than 75% of its clients are individuals that are not classified as high net worth. It’s owner, Brian Kimball Case must have had big dreams and wanted to also invest in private equity and run a private fund. That would require some additional compliance costs that he wanted avoid. He schemed to make an end-around on the regulatory requirements.

According to the SEC order, which the parties agreed tom, Mr. Case formed a parallel adviser, Bradway Capital, to be the adviser to two private funds he formed.

Bradway Capital filed with the SEC as an exempt reporting adviser. It took this position because it was an adviser to private funds with assets under management of less than $150 million.

The SEC disagreed with this position and took the position that Bradway Financial and Bradway Capital should be treated together. The two advisers were under common control and operationally integrated. They shared the same employees, operated in the same office, and shared the same technology systems.

Investment Advisers Act Release No. 3222 at 125 (June 22, 2011) [76 FR 39645, 39680 (July 6, 2011)]. In adopting several exemptions form the registration provisions of the Advisers Act, the Commission noted that certain commenters supported, for purposes of determining an adviser’s eligibility for an exemption from registration, treating each advisory entity separately without regard to the activities of, or relationships with its affiliates. The Commission declined to adopt this view, referring to Section 208(d) of the Advisers Act, which prohibits any person from doing indirectly or through or by any other person any act or thing which would be unlawful for such person to do directly.

The SEC took the position that Bradway Capital was not acting solely as an adviser to private funds and was not exempt.

The reason Mr. Case took this approach was to avoid the expense of complying with the Custody Rule by having to pay for an annual audit or surprise examinations.

The registration problem was just the tip of the iceberg. Obviously, the private fund failed the custody rule. There were some egregious valuations issues. Bradway failed to confirm that investors in the funds were Qualified Clients in order to be eligible for incentive payments.

The final mistake was using fund assets to pay for legal costs associated with this enforcement action. The fund documents allowed payment for costs directly relating to the ongoing activities of the fund. The enforcement action was against the adviser, not the fund, so the fund should have paid the legal fees.


On August 4 – 6, I will saddle up to ride with 6,200 other cyclists to raise money for life-saving cancer research and treatment at Dana-Farber Cancer Institute in the Pan-Mass Challenge. 100% of your donation will go to cancer research and treatment at Dana-Farber Cancer Institute through its Jimmy Fund. I have made a personal commitment to raise $8000.00. I hope that as a reader of Compliance Building you will support my fundraising effort. You can donate through any of the following links:

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