October 19, 1994
TO: COMPLIANCE COMMITTEE NO. 19-94
INVESTMENT ADVISER MEMBERS NO. 48-94
SEC RULES MEMBERS NO. 72-94
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 41-94
RE: SEC ISSUES TWO ORDERS SANCTIONING PORTFOLIO MANAGERS FOR
PERSONAL TRADING ACTIVITIES
__________________________________________________________
The Securities and Exchange Commission recently issued two
orders sanctioning portfolio managers with respect to their
personal trading activities. A copy of both orders is attached.
1. Portfolio Manager to Unregistered Investment Funds
In the first case, the Commission found that the portfolio
manager to unregistered investment funds purchased subordinated
notes for the funds and shortly thereafter purchased warrants of
the same issuer for herself. Had the portfolio manager purchased
the warrants for the funds, they would have enhanced the value of
the notes, due to the nature of the warrants.
The Commission found that the portfolio manager violated the
antifraud provisions of the Securities Exchange Act of 1934 and
the Investment Advisers Act of 1940. According to the order:
Where, as here, in the course of performing investment
advisory duties, a portfolio manager learns of an
investment opportunity of limited availability that
would be appropriate for a client and in which the
client would be financially and legally able to invest,
the portfolio manager commits fraud if the portfolio
manager invests in that opportunity without disclosing
that opportunity to the client (or a disinterested
representative) and obtaining the client's prior or
subsequent consent.
The Commission also found that the portfolio manager
concealed her purchase of the warrants from the investment
adviser, thereby causing the adviser to violate the books and
records provisions of the Investment Advisers Act. Without
admitting or denying the Commission's allegations, the portfolio
manager consented to an order barring her from the business and
requiring her to cease and desist from future violations of the
antifraud and books and records provisions.
2. Sanctions Against Portfolio Manager, General Counsel
and Investment Adviser
In the second case, the Commission sanctioned an investment
adviser and its portfolio manager and general counsel for actions
related to the portfolio manager's personal trading. The
Commission found that the adviser had failed to disclose to its
clients certain potential conflicts of interest, arising from the
fact that the portfolio manager provided advice to the organizers
of various companies, for which he received nonpublic securities
of those companies for nominal consideration. The adviser
subsequently purchased for its clients public securities of these
companies or their affiliates.
The Commission found that the portfolio manager had
precleared his purchase of the nonpublic securities with the
adviser's general counsel. Subsequently, and "without
determining whether [the adviser] had purchased securities of the
same issuers for clients," the general counsel executed
amendments to the adviser's Form ADV that did not disclose the
potential conflict at issue. The Commission's order states,
"Personal investments and personal business relationships with
issuers or persons related to issuers . . . require particularly
careful scrutiny and disclosure by an investment adviser." The
order further states:
The Commission takes seriously the obligation of
investment advisers and related persons to identify
potential conflicts of interest and make complete and
accurate disclosure of such conflicts, and in
appropriate cases, will not hesitate to bring
enforcement actions in circumstances where information
concerning a potential conflict is not disclosed at the
relevant time.
Without admitting or denying the Commission's findings, the
adviser, portfolio manger, and general counsel agreed to cease
and desist from violations of certain provisions of the
Investment Advisers Act and to a censure by the Commission. The
adviser also agreed to employ outside counsel to review its
policies and procedures and to pay a penalty of $500,000, and the
portfolio manager agreed to a penalty of $250,000.
Thomas M. Selman
Associate Counsel
Attachment