August 1, 1991
TO: SEC RULES MEMBERS NO. 40-91
RE: SEC CENSURES FUND ADVISER FOR "INTERPOSITIONING"
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The SEC recently censured an investment adviser to a fund
and an affiliated broker of the adviser for "interpositioning",
which is defined in the SEC's Order as "the practice whereby an
investment company, at the direction of an investment adviser,
uses a broker to effect a transaction as its agent, instead of
dealing directly with a market maker on a principal basis, to
purchase a security." The SEC found that the adviser had, in
violation of the antifraud provisions of the federal securities
laws, interpositioned the broker between the fund and dealers
making primary markets in over-the-counter securities that the
fund purchased, thereby causing the fund to incur unnecessary
expenses (i.e., the commissions that the broker charged the fund
for those securities transactions).
In addition, the SEC found that the adviser caused the fund
to violate Section 18(f)(1) of the Investment Company Act by
engaging in short sales without maintaining the required
collateral in a segregated account in compliance with the
guidelines of Investment Company Act Release No. 10666. The SEC
also found that the adviser willfully caused the fund to violate
Section 17(g) of the Act and Rule 17g-1(d) thereunder by failing
to ensure that the amount of the fund's fidelity bond was at
least equal to an amount computed in accordance with the schedule
contained in the Rule.
The SEC censured the adviser and required that it comply
with a number of conditions concerning the purchase of OTC
securities on behalf of the fund, including hiring an outside
consultant to prepare a report for the SEC on the adviser's
practices with respect to the purchase of such securities. The
affiliated broker involved with the interpositioning was
suspended for one year.
A copy of the SEC's Order is attached.
Amy B.R. Lancellotta
Assistant General Counsel
Attachment