FUND MANAGER TO PAY $16 MILLION FOR ALLOWING MARKET TIMING IN EXCHANGE FOR INVESTMENT IN AFFILIATED HEDGE FUND
The SEC ordered a mutual fund manager to pay $16 Million in fines, disgorgement and penalties in connection with a scheme whereby the manager allowed market timing in one of its mutual funds in exchange for a commitment by the timer to invest in the manager’s affiliated hedge fund. The mutual fund manager earned fees of 1.50% plus a 20% performance fee on the hedge fund. The timer, a
Our take: The focus on the violation of the joint transaction prohibition makes this case instructive to firms that manage both registered mutual fund and hedge funds. The SEC will closely scrutinize any activity that benefits a higher-fee hedge fund to the detriment of a lower-fee affiliated mutual fund. While the quid pro quo alleged in this action would be a clear violation of the Advisers Act and the Investment Company Act, managers should examine other areas including trade allocation, investment opportunity, disclosure, and insider trading.