October 25, 1993
TO: COMPLIANCE COMMITTEE NO. 26-93
INVESTMENT ADVISERS COMMITTEE NO. 29-93
SEC RULES COMMITTEE NO. 93-93
RE: SEC SANCTIONS MUTUAL FUND ADVISER FOR VIOLATIONS OF THE
1940 ACT
__________________________________________________________
The Securities and Exchange Commission instituted proceedings against an
investment adviser to two mutual funds ("Adviser") to determine whether the
Adviser (1) caused violations of Sections 17(a)(1) and (2) and 17(d) of the
Investment Company Act of 1940 and Rule 17d-1 thereunder (which generally
prohibit joint and affiliated transactions), and (2) failed reasonably to
supervise one of its portfolio managers with a view to preventing violations of
these provisions and of Section 31(a) of the Investment Company Act and Rule 31a-
1(b)(6) thereunder (which impose certain recordkeeping requirements).
Pursuant to an offer of settlement, the Adviser, without admitting or
denying the Commission’s findings, consented to the issuance of an order
instituting the proceedings and imposing certain remedial sanctions.
According to the Commission’s order, a portfolio manager then associated
with the Adviser frequently delayed designation of the account for which trades
in Standard & Poor’s 500 Stock Index Futures were being conducted until after the
trades were effected. The Commission found that the portfolio manager allocated
more favorable trades to a private profit-sharing plan for the Adviser’s
employees and less favorable trades to two mutual funds managed by the Adviser.
As a result, the Commission found that the Adviser caused the profit-
sharing plan to engage as a principal in futures transactions under a joint
arrangement with the mutual funds, in violation of the Investment Company Act.
The Commission also found that this trading activity resulted in the Adviser
causing the profit-sharing plan, acting as principal, to engage with the mutual
funds in purchase and sale transactions prohibited by the Act. Finally, the
Commission found that the Adviser failed reasonably to supervise the portfolio
manager with a view to preventing these violations and violations of certain
record-keeping requirements under the Act.
The Commission ordered that the Adviser cease and desist from committing
or causing the violations described above; that it be censured; that it pay $9.2
million to be distributed for the benefit of shareholders, which will satisfy
both the SEC and Commodity Futures Trading Commission proceedings against the
Adviser; and that it retain an independent consultant to review the Adviser’s
policies and procedures related to trading in connection with its investment
advisory and investment company operations.
A copy of the Commission’s order is attached.
Paul Schott Stevens
General Counsel
Attachment