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Alt Fund Adviser Agrees to Settle SEC Charges for Compliance Violations

Water Island Capital, an adviser to several alternative funds, agreed to pay $50,000 to settle SEC charges for various compliance violations.  The settlement follows the SEC’s sweep of alternative funds.  

Water Island’s violations included:

  • The failure to comply with the funds’ policies and procedures regarding custody.  Water Island kept $247 million in cash collateral for the funds’ investments in certain swaps at broker-dealer counterparties instead of the funds’ custodian bank.
  • The failure to implement the funds’ policies and procedures to prevent directed brokerage.  Water Island did not create and maintain the required list of approved executing brokers, nor did it maintain documentation regarding the monitoring of the funds’ compliance with the procedures.
  • The failure to comply with Rule 38a-1 due to the compliance failures with respect to custody and directed brokers.

The case is a reminder for fund boards that oversight of alternative funds, particularly those funds that are managed by sub-advisers, may present some unique challenges.  The Forum’s publication, Board Oversight of Alternative Funds, has more information for boards on overseeing these funds.