In the Matter of Structured Portfolio Management, L.L.C.

Structured Portfolio Management, L.L.C., and its affiliates, SPM Jr., L.L.C., and SPM IV, L.L.C. (collectively, SPM) were the respective investment advisers to three hedge funds: Structured Servicing Holdings Master Fund, L.P. (SSH); Parmenides Master Fund, L.P. (Parmenides); and Aqueous Master Fund, L.P. (Aqueous). SSH, Parmenides, and Aqueous had separate portfolio managers, though Aqueous’s portfolio manager (the hedge trader) also traded U.S. Treasury securities for SSH and Parmenides to hedge the interest-rate risk associated with their primary investments, which were mortgage-backed securities and other mortgage-related securities. The hedge trader often traded the same Treasury securities for Aqueous as part of Aqueous’s core holdings. The trading of the same securities across all three hedge funds created a conflict of interest over how to allocate the trades. An internal review by SPM revealed that when the three funds traded the same Treasury security on the same day, Aqueous consistently bought at lower prices and sold at higher prices than SSH and Parmenides. SPM temporarily removed the hedge trader from trading for SSH and Parmenides, and during that time the hedge trader traded solely for Aqueous. Although SPM attempted to improve its trade-confirmation process prior to the resumption of the hedge trader’s trading duties with SSH and Parmenides, SPM did not modify its written policies and procedures to address the potential for conflicts of interest in trade allocations. Nor did it modify those policies and procedures when concerns over trade allocations subsequently arose again. SPM also lacked adequate written policies and procedures to prevent inaccurate disclosures to investors. Aqueous initially represented to investors that it would invest primarily in mortgage-related securities. After Aqueous gradually stopped trading mortgage-related securities and shifted almost exclusively to Treasury securities, it continued to represent that it was primarily invested in mortgage-related securities. The Securities and Exchange Commission (SEC) brought an administrative proceeding against SPM for violations of § 206(4) of the Investment Advisers Act of 1940 (Advisers Act) and Rule 206(4)-7 under that section.