September 23, 1992
TO: INVESTMENT ADVISER MEMBERS NO. 43-92
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 35-92
COMPLIANCE COMMITTEE NO. 14-92
RE: SEC SANCTIONS PORTFOLIO MANAGER FOR AGENCY
CROSS-TRANSACTIONS
__________________________________________________________
The Securities and Exchange Commission recently issued a
cease and desist order and imposed a penalty on a portfolio
manager of a registered investment adviser, in connection with
certain agency cross-transactions.
On September 12, 1990, the manager caused two of his
clients to purchase World Bank bonds issued that day. The
manager subsequently learned that the purchases would not settle
until October 2, 1990, which made the investment inconsistent
with the desire of one of the clients to be in a cash position on
September 30, 1990. On September 25th, the manager caused that
client’s bonds to be sold to the other client, without obtaining
the purchasing client’s consent, and he caused the adviser to
deliver to the purchasing client portfolio summaries that
incorrectly reflected that the purchase occurred in only one
transaction on September 12th.
Although the September 25th transaction was effected at the
original issuance price, the World Bank bonds were quoted at a
lower price in the secondary market on that date. The adviser
subsequently reimbursed the purchasing client (through a
reduction in the client’s advisory fee) for the difference
between the price that it was charged for the World Bank bonds
purchased on September 25th and the market price on that day.
The SEC found that the manager caused the adviser to
violate Sections 206(2) and 206(3) of the Investment Advisers
Act. In particular, the SEC found that the adviser essentially
acted as broker for both clients and as adviser to the purchasing
client, without disclosing the adviser’s dual roles to the
purchasing client or obtaining the purchasing client’s consent
before completing the transaction.
The portfolio manager, without admitting or denying the
allegations, consented to an order to cease and desist from
committing or causing any violation of Section 206(2) and 206(3),
and to pay a penalty of $15,000.
A copy of the SEC’s order is attached.
Thomas M. Selman
Assistant Counsel
Attachment