The Securities and Exchange Commission has settled charges against Hartford, Connecticut-based registered investment adviser 3D/L Capital Management, LLC for failing to fully and fairly disclose material facts and conflicts relating to its agreements with an investment manager for certain exchange traded funds (the “ETF Manager”). The SEC also charged 3D/L with failing to implement disclosure-related policies and procedures.
The SEC’s order finds that 3D/L offers to its clients the opportunity to invest in proprietary model portfolios comprised of investments in ETFs and other securities. As set forth in the order, in October 2020, the ETF Manager agreed to pay 3D/L an “onboarding fee” in exchange for 3D/L making the ETF Manager’s funds available for potential use in the model portfolios. The SEC’s order also finds that, in November 2020, 3D/L became the sub-adviser to a fund managed by the ETF Manager. As set forth in the order, under the sub-advisory agreement, the ETF Manager agreed to pay 3D/L a sub-advisory fee that was based on net revenues earned from the fund. The SEC’s order finds that both of these agreements created conflicts of interest, because they created an incentive for 3D/L to use funds managed by the ETF Manager in 3D/L’s model portfolios. The order also finds that soon after entering these agreements, 3D/L’s investment committee began including funds managed by the ETF Manager in some of the 3D/L model portfolios. According to the order, as a result of these model allocation changes, 3D/L client accounts invested in those model portfolios purchased funds managed by the ETF Manager, and 3D/L earned investment advisory fees on those assets. As set forth in the order, 3D/L did not fully and fairly disclose the “onboarding fee” and the related conflicts of interest until March 2023 and did not fully and fairly disclose terms of the sub-advisory agreement and the related conflicts of interest until August 2022. The SEC’s order also finds that 3D/L failed to implement written compliance policies and procedures related to the disclosure of conflicts of interest.
The SEC’s order finds that 3D/L violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. Without admitting or denying the findings, 3D/L consented to a cease-and-desist order and a censure, and agreed to pay disgorgement of $153,069, prejudgment interest of $7,538, and a civil money penalty of $125,000. 3D/L has also agreed to distribute funds to harmed investors.
