Bank to Pay Over $600 Million for Misleading Collective Fund Investors
A large bank agreed to pay over $600 Million in fines and restitution for misleading collective fund investors about subprime exposure. The SEC alleges that the bank did not adequately disclose that the collective funds, which are unregistered funds for employee benefit plans, were concentrated in subprime investments and used derivatives to leverage their exposure. Investors lost money when the subprime market seized in 2007. The SEC also alleges that clients of the bank’s internal advisory group had superior information about the funds, which allowed them to redeem before other clients.
OUR TAKE: Much can be said about this cautionary tale of fund sponsor that fails to disclose material information and favors certain clients. However, we will focus on the jurisdictional issue. Why is this an SEC case when the bank was not a registered investment adviser and the fund was an unregistered collective fund? Shouldn’t this be a case for the banking regulators whose supervision is the reason for the securities laws exemptions? This case will raise the debate on the safety of collective funds versus registered funds.