Advisers Fined $5 Million for Disclosure and Compliance Violations Related to Securities Lending and Unreimbursed Tax Expenses for Mutual Fund Clients

September 23, 2019

On September 16, 2019, the SEC issued a settled order describing violations of the Investment Advisers Act of 1940 (“Advisers Act”) and rules thereunder by two registered advisers for undisclosed conflicts of interest and misleading disclosures relating to certain securities lending practices, and misleading disclosures and deficient policies and procedures relating to unreimbursed tax expenses with respect to mutual funds managed by the advisers (the “Funds”).

The Funds were underlying investment options for variable annuity and variable life insurance contracts sold by insurance company affiliates of the advisers and other participating insurance companies, with Fund shares held by the insurance companies in separate accounts for the benefit of the contract holders. The Funds’ portfolio securities on loan were recalled to provide tax benefits to the advisers’ parent and insurance company affiliates. According to the Order, this conflict was not adequately disclosed (i) to the Funds’ boards, (ii) to the SEC during an exam, or (iii) in the Funds’ offering documents, despite having been raised by an employee of the Funds’ affiliated securities lending agent with knowledge of the conflict.

In addition, the advisers delayed causing the Funds to be reimbursed for the increased foreign tax rates to which they were subject as a result of a tax conversion undertaken to provide the advisers’ parent and insurance company affiliates with certain tax benefits, and the delays in payments were estimated to cost the Funds $25 million in foregone income. In a settled action against Voya Investments, LLC in 2018 alleging similar violations for comparable securities lending practices, Voya was ordered to pay a civil penalty of $500,000.

These orders are available here:

https://www.sec.gov/litigation/admin/2018/34-82837.pdf and here: https://www.sec.gov/litigation/admin/2019/ia-5346.pdf.

This Seward & Kissel memorandum describes the above action in greater detail: https://www.sewkis.com/publications/advisers-fined-5-million-for-disclosure-and-compliance-violations-related-to-securities-lending-and-unreimbursed-tax-expenses-for-mutual-fund-clients/


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Enforcement Actions, Investment Advisers, Investment Companies