Water Island Capital LLC, an investment adviser registered with the Securities and Exchange Commission, agreed to pay a fine of US $50,000 for holding certain customer funds with broker-dealers and not with a custodial bank, among other violations of law. According to the SEC, Water Island currently manages approximately US $3.5 billion in assets for several mutual funds, including mutual funds commonly known as “alternative mutual funds” (these are mutual funds for which Water Island trades equities and derivatives, including swaps, as part of a merger arbitrage). Under law, if a mutual fund maintains securities and similar investments in the custody of a qualified bank, the cash proceeds from the sale of such securities and investments, as well as other cash assets must likewise be held in the custody of such bank. Although Water Island’s compliance procedures incorporated this requirement in 2012, the SEC claimed that the firm did not maintain certain customer assets with such a bank, as required, from January to September 2012. These assets included approximately $247 million in cash collateral that were held instead with broker-dealers, according to the SEC. In accepting Water Island’s settlement, the SEC “considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff.”