Deutsche Bank marketed a robust, independent due diligence process to identify, evaluate, and select best-in-class asset managers. But failed to disclose that it only recommended hedge funds that shared their management fees with the bank.
DB disclosed that it might receive revenue sharing and actually disclosed the amount it received in the subscription agreement. DB can recommend only its own products to its clients, as long as there is good disclosure.
However, the SEC felt that DB did not have good disclosure. The marketing for the fund failed to disclose that it was only recommending funds that agreed to pay a kickback to DB.
The SEC has been focusing on these “retrocessions.” What is interesting about this case is that the bank was not a registered adviser or broker-dealer. The bank was charged with violating the Securities Act’s anti-fraud provisions (17(a)(2)).
This is not the first time this has happened. JP Morgan paid a $267 million settlement to the SEC in 2016. The bank was investigated for steering high-net-worth clients toward its own proprietary investment funds that could cost more rather than those managed by other institutions.
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