Registered Fund Adviser and Affiliate Censured and Fined for Violations of Section 12(d)(1)(A) (Fund of Funds Limitations) and Compliance Rules

July 8, 2020

On July 2, 2020, the SEC entered into a settlement order with an adviser and its foreign affiliate (Order) involving violations of the fund-of-funds ownership restrictions in Section 12(d)(1)(A) of the 1940 Act and the compliance rules contained in Rule 38a-1 under the 1940 Act and Rule 206(4)-7 under the Advisers Act.

Certain registered funds managed by the adviser and certain foreign funds managed by the foreign affiliate exceeded the 1940 Act’s fund-of-funds restrictions as a result of investments in ETFs, and some of the registered funds incurred losses from selling shares of an ETF to correct the violation.

These losses initially were not reimbursed by the adviser and were not disclosed to the registered fund’s board.  The Order also alleged that the adviser violated its trade error policy and made misleading disclosures to the registered funds’ board in violation of the Investment Advisers Act of 1940.

The Order is available here:

This Seward & Kissel memorandum describes the Order in greater detail:


Compliance, Enforcement Actions, Exchange-Traded Funds (ETFs), Investment Advisers, Investment Companies