Faulty legal advice proves costly for unregistered fund manager

The former operator of an unregistered investment fund agreed to pay $1.7 million in a settlement with the Ontario Securities Commission (OSC).

An OSC hearing panel approved a settlement with Daniel Sheehan, who admitted to violating securities law by trading without registration and acting as an unregistered fund manager.

In settling the allegations, he agreed to make a $1.6-million voluntary payment and to pay $100,000 in costs. He also agreed not to apply for registration for one year.

According to the settlement, Sheehan ran a successful investment vehicle, Sheehan Associates Limited Partnership (SALP), for about 20 years.

When he established the LP in 1999, he was advised by a securities lawyer that he didn’t need to be registered, because the LP was set up as a private investment club, meaning it didn’t require registration.

However, the lawyer didn’t tell him that he would be able to earn only normal brokerage fees for his services.

Instead, the fund paid a 25% performance fee for returns he generated over 6%, and provided a clawback to ensure that investors received at least a 6% return. Under that structure, Sheehan earned about $21 million in compensation between 2009 and 2019.

The fund’s lowest annual return during the period was 3.3%, and its highest was 46.8%. It invested largely in publicly traded equities.

According to the settlement, Sheehan didn’t knowingly violate securities law, and he relied on the legal advice he received in 1999 in not getting registered.

The commission also noted there were no investor complaints against him and that he didn’t solicit investors for his fund.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.