On August 25, 2016, the SEC announced settled administrative proceedings against Orinda Asset Management, LLC (the Adviser), a registered investment adviser, for failing to disclose a termination waiver arrangement with a sub-adviser in connection with a “manager-of-managers” exemptive order application. The Adviser and Advisors Series Trust, a registered open-end management investment company (the Trust, and together with the Adviser, the Parties), sought an exemptive order to permit the Parties to enter into and materially amend sub-advisory agreements without shareholder approval and to exempt them from certain disclosure requirements.
According to the SEC, the Parties’ initial application for multimanager exemptive relief disclosed that the Adviser entered into an agreement with its lead sub-adviser, SkyView Investment Advisors, LLC (the Sub-Adviser), providing for termination payments should the Adviser recommend the Sub-Adviser’s termination for something other than cause. The SEC order explains that the Division of Investment Management (IM) informed the Parties that, in view of the prohibition against termination restrictions in Section 15(a)(3) of the 1940 Act1 and the potential inconsistency with fiduciary obligations, it would not support the application with the termination payment provisions. Consequently, the Parties agreed to remove the provisions at issue and filed an amended application. The SEC alleges that, in the interim, the Adviser and SubAdviser entered into a revised side agreement in which the Adviser waived its ability to terminate, or recommend the termination of, the Sub-Adviser altogether. The order states that neither the Adviser nor the Trust informed IM of the revised side agreement and, subsequently, IM granted the exemptive order. The SEC also alleges that the Trust’s registration statements for the funds advised by the Adviser inaccurately stated that all of its sub-advisory agreements could be terminated at any time by the Adviser and failed to disclose the side agreement with the Sub-Adviser.
Section 34(b) of the 1940 Act makes it unlawful for any person to make any untrue or misleading statement of material fact in any registration statement, application, report, account, record or other document filed with the SEC under the 1940 Act, or to omit from any such document any fact necessary in order to prevent the statements made therein from being materially misleading. According to the SEC, multimanager orders rely upon a fund’s primary investment adviser being able to oversee sub-advisers and to recommend their hiring, termination and replacement to the fund’s board. The SEC alleges that because the Adviser was to oversee the Sub-Adviser, and the Sub-Adviser was to assist the Adviser in the selection, monitoring and evaluation of other sub-advisers, the termination waiver was material to IM’s evaluation of the request for exemptive relief. As a result, the SEC found that the Adviser violated, and caused the Trust’s violations of, Section 34(b) of the 1940 Act.
The SEC ordered that the Adviser cease and desist from committing or causing any violations and any future violations of Section 34(b) of the 1940 Act, censured the firm and ordered the Adviser to pay a $75,000 civil money penalty.
A copy of the order is available at: www.sec.gov/litigation/admin/2016/ia-4513.pdf