Transactions between a hedge fund manager principal and a fund managed by that manager, while not prohibited, are potential minefields because of the inherent conflicts of interest they present: On one side of the transaction, the principal is acting as agent for the fund; on the other, the principal is acting in his or her own interest.  At a minimum, pursuant to Section 206(3) of the Investment Advisers Act of 1940, managers must provide advance written disclosure to fund investors of the proposed transaction and obtain consent.  See “When and How Can Hedge Fund Managers Engage in Transactions with Their Hedge Funds?,” Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011).  A recently-settled SEC enforcement action is a reminder of the perils of proceeding in the absence of full disclosure and consent.  This article summarizes the details of the principal transaction, the SEC’s charges and the sanctions imposed on the principal by the SEC.  For a discussion of an action alleging violation of Section 206(3), see “How Can Hedge Fund Managers Structure Their Compliance, Reporting and Disclosure Systems to Avoid Allegations of Principal Trading Rule Violations Such As Those Recently Alleged by the DOJ Against Former Bear Stearns Hedge Fund Manager Ralph Cioffi?,” Hedge Fund Law Report, Vol. 2, No. 36 (Sep. 9, 2009).