SEC Charges Mutual Fund Manager with Misrepresenting Trading Strategy to Board
The SEC has brought an action against a mutual fund manager and its principal for misrepresenting his ability to implement a purported investment strategy. According to the SEC, during the 15(c) review process where the Board evaluates fund advisers, the respondent claimed to use algorithmic currency trading to execute the fund’s strategy. The respondent described his quantitative strategy in a live PowerPoint presentation to the Board. However, the SEC alleges that the adviser did not use an algorithmic model, but, instead, hired a trader to execute the strategy based on technical analysis and “her own intuition.” The adviser ultimately terminated the trader for poor performance. The SEC charges violations of Sections 15(c) and 34(b) of the Investment Company Act and the anti-fraud provisions of the Advisers Act.
OUR TAKE: Although Section 15(c) requires a Board to evaluate and approve all advisers, the adviser has an obligation to provide all necessary information that the Board would need to undertake a reasonable evaluation. The 15(c) process should be a collaborative sharing of information, not a sales pitch.