40 Act Blog

SEC Charges Adviser with Failure to Disclose Its True Ownership and Conflicts of Interest

The SEC brought an administrative action against SignalPoint Asset Management, LLC (SAM), and several related individuals (Principals) for failing to disclose the  individuals’ control of SAM and their conflicts of interest.  SAM is headquartered in Springfield, Missouri.

SEC Provides Proxy Voting Guidance

The SEC’s Division of Investment Management issued Staff Legal Bulletin No. 20 which provides guidance about an investment adviser’s responsibilities in voting client proxies and retaining proxy advisory firms. In the bulletin, the SEC staff responds to 13 questions about Rule 206(4)-6 (the proxy voting rule) and the retention of proxy advisory firms. Among other issues, the bulletin addresses:

• the steps that an investment adviser can take to demonstrate that proxy votes are cast in accordance with its clients’ best interests and the adviser’s proxy voting procedures;
• whether an investment adviser is required to vote every proxy;
• the considerations that an investment adviser should take into account if it retains a proxy advisory firm to assist it in its proxy voting duties; and
• the extent to which an investment adviser has an ongoing duty to oversee a proxy advisory firm that it retains.

Click http://www.sec.gov/interps/legal/cfslb20.htm to access the bulletin.

SEC Adopts Cross-Border Swap Rules

The SEC proposed a series of rules addressing the application of security-based swap regulatory requirements under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) to cross-border activities.  The security-based swap market often involves counterparties located in different countries.  According to the SEC, a majority of transactions involving single-name credit default swaps on U.S. reference entities involve one or more counterparties located abroad. The SEC acknowledged that regulating the swap market is challenging because of its global and interconnected nature.

Adviser Found to Have Improperly Relied Upon Registration Exemptions

The SEC brought an administrative action against Penn Mezzanine Partners Management, L.P. and TL Ventures Inc., a related investment adviser, in connection with violations of the Advisers Act’s registration requirement by Penn Mezzanine.

Adviser Charged with Front Running

The SEC brought an enforcement action against Siming Yang, alleging that Yang engaged in a fraudulent front-running scheme whereby he sought to personally profit in connection with purchasing securities issued by Zhongpin Inc.

Enforcement Action Brought Against President and CCO of Adviser with Inadequate Insider Trading Procedures

The SEC brought an enforcement action against Thomas Meade, President and CCO of Private Capital Management, Inc., formerly a registered investment adviser based in Denver, Colorado. The SEC alleges that Meade failed to prevent, detect or respond to insider trading by a former PCM, Inc. Vice President, Drew Peterson in 2010.

Charges Brought Against Adviser for Failing to Disclose an Improper Rebate Arrangement Related to Client Bond Trades

The SEC brought an enforcement action against UASNM, Inc., a registered investment adviser, and its former chief executive officer and majority owner, Dennis Malouf, in connection with alleged misconduct with respect to client bond trading.

SEC’s Division of Investment Management Reminds Series Funds About Affiliated Transactions

The SEC’s Division of Investment Management issued its latest IM Guidance Update, which reminds investment company registrants and their advisers about the 1940 Act’s prohibitions on affiliated transactions. Specifically, the Guidance Update states that “a mutual fund should review its compliance policies and procedures for the appropriate identification of ‘affiliated persons’ with respect to each series of the mutual fund for purposes of transactions that may be prohibited under the 1940 Act.” The Guidance Update further states that “to prevent violations of section 17(a) of the 1940 Act, a mutual fund’s compliance policies and procedures should provide for the identification of, among others, persons owning 5% or more of the outstanding voting securities of a series, in a manner that is appropriate to the circumstances of the particular mutual fund.”

U.K. Portfolio Manager Charged with Aiding and Abetting Section 17(d) Joint Transaction Violation

The SEC brought an administrative action against Christopher B. Ruffle in connection with a prohibited joint transaction violating Section 17(d) of the 1940 Act and Rule 17d-1 thereunder.  The SEC stated that in April 2009, in the midst of the financial crisis, Martin Currie, a U.K.-based group of investment managers, used its U.S.-registered investment company client, the China Fund, Inc. (China Fund), to invest in a convertible bond transaction that directly benefited another Martin Currie client, a hedge fund called the Martin Currie China Hedge Fund L.P. ( “Hedge Fund”). The Hedge Fund, an affiliated person of the China Fund, had previously acquired significant, and largely illiquid, exposure in the form of bonds to a single Chinese company and required liquidity to satisfy mounting redemption requests from its investors.

SEC Brings Cherry-Picking Case Against an Investment Adviser

The SEC won a decision against Charles J. Dushek and Charles S. Dushekan, both from Illinois, for engaging in “cherry-picking.” The SEC had alleged that the Dusheks used their Lisle, Illinois-based investment advisory firm, CMA, to defraud CMA clients by conducting a “cherry-picking” scheme that garnered the Dusheks nearly $2 million in illicit profits. The SEC stated that the Dusheks placed millions of dollars in securities trades without designating in advance whether they were trading personal funds or client funds. They delayed allocating the trades so they could cherry pick winning trades for their personal accounts and dump losing trades on the accounts of unwitting clients at CMA. CMA also misrepresented the firm’s proprietary trading activities to clients.
The Dusheks must pay $2,058,514 in total disgorgement and $244,222 in prejudgment interest thereon, and each must pay a $150,000 civil penalty.

Click here to access the administrative order