The adviser to four collective investment trusts (CITs) and its principal/PM/CEO agreed to pay over $7.6 Million in disgorgement and penalties for ignoring the CITs’ board and incurring losses due to over-concentration in a single security. The board recognized that the CITs were overconcentrated in a single security that comprised 30% to 89% of their assets. The board instructed the adviser to reduce the concentrations to 10%, and the adviser undertook to put a plan together. According to the SEC, the adviser ignored the board, the CITs continued to be over-concentrated, and the CITs ultimately experienced significant losses as a result. The board fired the adviser soon thereafter. The CITs were sponsored by a trust company affiliated with the adviser.
A fund board, even if completely independent, has few remedies available when confronted with a fund sponsor that misleads or ignores the board. The board can threaten to terminate the adviser (or constructively terminate by reducing fees), but that only leads to the untenable situation of a board having to find a new manager or closing the fund. Perhaps, the U.S. fund industry should consider a European-style governance structure that includes a third party trustee that can monitor and step in if necessary.