The SEC recently sanctioned, apparently for the first time, a mutual fund adviser for failing to provide a fund’s board of trustees, in violation of Section 15(c) of the Investment Company Act of 1940 and Section 206(2) of the Investment Advisers Act of 1940, information reasonably necessary to evaluate a fund-related guarantee in connection with a series of investment advisory contract renewals. The adviser was also sanctioned for filing with the SEC, in violation of Section 34(b) of the Investment Company Act, prospectuses, annual reports and registration statements in which the adviser allegedly misrepresented that there was no charge to the fund and its shareholders for the guarantee. The case may signal a more aggressive stance by the SEC in its examination of information that advisers provide to fund boards to justify their management fees.
The case involved the renewal of three investment advisory contacts, which were approved by the fund’s board and its disinterested members over a period of two and a half years. For each contract renewal process, commonly known as the “15(c) process,” the SEC found that the adviser urged the fund’s board to consider the guarantee feature in evaluating the proposed management fees, which were among the highest of the fund’s peer-group of mutual funds. While the adviser was claiming that the guarantee should be considered to justify its management fees, the adviser was also allegedly filing with the SEC prospectuses, annual reports, and registration statements in which it represented that there was no charge to the fund or its shareholders for the guarantee.
To settle the case, the adviser, without admitting or denying the SEC’s findings, agreed to pay a disgorgement of $3,950,075, prejudgment interest of $1,350,709, and a civil penalty of $800,000. The SEC’s order and related findings In the Matter of New York Life Investment Management LLC, SEC Administrative Proceeding (File No. 3-13487), can be found on the SEC website.