SEC Upholds Penalties Against Mutual Fund Trader Accused of Accepting Gifts
The full SEC upheld findings and penalties imposed by an Administrative Law Judge against a mutual fund trader that received personal gifts for directing trades. The SEC rejected the respondent’s argument that the SEC failed to show that any fund was disadvantaged by paying a higher commission rate than otherwise available. The respondent challenged the charge (under Section 17(e)(1) of the Investment Company Act) that he received compensation “for the purchase and sale of any property to or for” an investment company, arguing that the SEC could not prove higher commission rates. The SEC said that the respondent had the burden of proof to show how he did not violate his fiduciary duty, but that the respondent offered no such proof. Also, the SEC said that such proof may not have changed the outcome because the respondent would have had to prove that the gifts were unrelated to his role as equity trader. The SEC said that satisfactory commission rates would not have cured his “abuse of trust” that Section 17(e)(1) was designed to eliminate. The SEC upheld the sanctions including over $200,000 in disgorgement and penalties.
OUR TAKE: The “client wasn’t harmed” defense doesn’t work when charged with a breach of fiduciary duty. A fiduciary may not use his/her/its position of trust to obtain benefits.