On August 5, 2011, the SEC issued an opinion in the case of a mutual fund trader accused of accepting gifts from brokerage firms with whom he regularly placed orders. The SEC upheld an administrative law judge’s decision that Robert Burns, an equity trader who was an affiliated person of an investment adviser, willfully violated Section 17(e)(1) of the 1940 Act by accepting compensation from brokerage firms to which he transmitted orders to buy and sell securities on behalf of certain mutual funds that were clients of the adviser. The opinion is significant in that it sets forth the SEC’s views as to the requirements for liability under Section 17(e)(1). The text of the opinion is available here.
Section 17(e)(1), in relevant part, prohibits the receipt (i) by an affiliated person of an investment company, (ii) acting as agent, (iii) of compensation from any other source (iv) for the purchase or sale of the investment company’s property. Finding that the first three prongs of the statute were met in Mr. Burns’ case, the SEC focused on the fourth requirement for liability: that the compensation be received “for the purchase or sale of any property to or for” a registered investment company. The SEC stated that this provision does not require the SEC to prove that the compensation was given and received with the intent to influence; rather, the SEC must simply establish that, in accepting such compensation, a conflict existed between the trader together with his employing investment adviser and the mutual funds being advised. The opinion explains that once the SEC has made a prima facie showing that a conflict existed, the burden of proof shifts to the defendant to prove that none of the gifts he received were in exchange for the brokerage business he distributed. Furthermore, the SEC took the position that regardless of the detriment to the mutual funds, the trader must prove that he did not violate his fiduciary duty. This case represents a clear statement by the SEC that a mutual fund trader who accepts gifts from brokerage firms will bear the burden of proving that none of the gifts violated the trust placed in the trader by a mutual fund and its shareholders.