SEC Charges Fund Manager and PM with Lying to Board and Compliance Failures
The SEC has commenced enforcement proceedings against a fund manager and its portfolio manager for misleading the Board about portfolio risks and failing to update compliance procedures. According to the SEC, the respondents, who managed a money market fund, failed to inform the Board that it exceeded internally-imposed maturity, credit risk, and concentration limits. The SEC also charges that the firm failed to amend its compliance policies and procedures to implement the stress testing required by changes to Rule 2a-7 in 2010. The SEC had commenced a review of the fund because it consistently generated returns higher than its peer group. The SEC charges violations of the Advisers Act’s antifraud rules (206(1) and 206(2)) and several Investment Company Act rules: forward pricing (22c-1), compliance (38a-1), names (35(d)), books and records (31(a)-1), and anti-fraud (34(b)).
OUR TAKE: Although much recent attention has focused on independent director liability, this case follows the more typical line of enforcement cases where the investment manager has liability for withholding information from the Board. Also, firms should ensure that somebody (usually the CCO) has responsibility to update the compliance policies and procedures when the laws and rules change.