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Regulatory Sanctions

Deutsche Bank Fined Over Misleading Hedge Fund Disclosures

April 25, 2019

by Howard Haykin


Deutsche Bank Trust Company Americas (“DBTCA”) provides discretionary and non-discretionary investment management services to private banking clients - high net-worth individuals, families and select institutions. The Services include portfolio allocation and asset selection for each account, some of which include allocations to Hedge Funds.
DBTCA is a New York chartered commercial bank and … member of the Federal Reserve System. DBTCA is a wholly-owned subsidiary of Deutsche Bank Trust Corporation, a New York corporation, which in turn is an indirect wholly-owned subsidiary of Deutsche Bank Aktiengesellschaft.



In marketing materials, requests for proposal (RFPs), and other related documents provided to clients, DBTCA disclosed that it relies on an independent, in-house research group (“Research Group”) that uses a multi-step due diligence process to identify, evaluate, and select best-in-class mutual funds, ETFs and alternative products, including Hedge Funds, selected from a broad database of asset managers.


WHAT WENT WRONG.    However, according to the SEC, from as early as 2009 through mid-2018, DBTCA failed to also disclose that the Research Group limited its review and selection of Hedge Funds to only those managers that agreed to pay a portion of its management fee to DBTCA - payments referred to as “retrocessions.”


Moreover, …


  • DBTCA’s advisory agreements disclosed that DBTCA “may” receive all or a portion of management fees that pooled investment vehicles charge, when, in fact, the payment of retrocessions was a requirement for all Hedge Funds that DBTCA recommended.


  • Though each client who invested in Hedge Funds were advised that DBTCA would receive from such Hedge Funds the aforementioned retrocession, they were not told that DBTCA recommended only those Hedge Funds that agreed to pay retrocessions.



DBTCA’s omission from its disclosures that only Hedge Funds that agreed to pay retrocessions were recommended to its clients rendered materially misleading … (i) DBTCA’s disclosures regarding its due diligence process for Hedge Funds; and, (ii) statements in advisory agreements that stated only generally that it “may” receive retrocessions for investment in pooled investment vehicles.
DBTCA agreed to pay a $500,000 fine to settle SEC charges that it violated Section 17(a)(2) of the Securities Act, which prohibits any person in the offer or sale of securities from obtaining money or property by means of any untrue statement of material fact or any omission to state a material fact necessary in order to make statements made not misleading.



For further details on this case, click on … SEC Administrative Proceeding File No. 3- 19154.