An initial decision handed down by Chief Administrative Law Judge Brenda P. Murray (ALJ) on April 20, 2012 highlights the severe penalties that can be imposed on investment advisers and their principals for making materially false Form ADV filings.  The enforcement action in question involved a registered investment adviser and its owner (respondents) that were charged with failing to disclose compensation received from a hedge fund manager that was recommended to the investment adviser’s clients.  For a previous discussion of the initiation of this administrative proceeding, see “An Investment Adviser May Not Call Itself Independent If It Receives Fees from Underlying Managers,” Hedge Fund Law Report, Vol. 4, No. 33 (Sep. 22, 2011).  This article outlines: the factual background in this case; the holdings and legal analysis applied by the ALJ; the sanctions imposed on the respondents; and some lessons learned for investment advisers that file Forms ADV with the SEC.