On August 25, 2016, the SEC announced that it had settled an enforcement action against Orinda Asset Management, LLC (“Orinda”), a registered investment adviser to two registered investment companies (the “Funds”). According to the settlement order, in 2011, Orinda and the Funds applied for a manager-of-managers exemptive order. The application disclosed that Orinda had entered into a side agreement with the principal sub-adviser that provided for termination payments if Orinda were to recommend that the sub-adviser should be terminated for something other than cause. The Division of Investment Management (the “Division”) informed Orinda and the Funds that it would not support the application in light of the termination payment arrangement. In 2012, Orinda and the Funds amended the application and eliminated any discussion of the side agreement with the principal sub-adviser.
Based on the representations in the amended application, in 2012, the SEC granted the manager-of-managers exemptive order. However, according to the settlement order, before filing the 2012 amended application, Orinda had (i) agreed with the principal sub-adviser to waive Orinda’s ability to terminate, or recommend the termination of, the sub-adviser, and (ii) informed legal counsel to the Funds and the Funds’ board of trustees of Orinda’s termination waiver. The settlement order states that neither Orinda nor the Funds informed the Division of the revised side agreement with the principal sub-adviser and, further, that the Funds’ registration statements inaccurately disclosed that all of the Funds’ sub-advisory agreements could be terminated at any time by Orinda.
Based on these facts, the SEC determined that Orinda had willfully violated Section 34(b) of the 1940 Act, which makes it unlawful for any person to make any untrue or misleading statement of a material fact in a document filed with the SEC, or to omit from such a document any fact necessary in order to prevent the statements made therein from being materially misleading. In settlement of the action, without admitting or denying the SEC’s findings, Orinda agreed to be censured and to pay a civil penalty of $75,000.
On September 8, 2016, the SEC issued a rarely seen notice of intent to rescind Orinda’s 2012 exemptive order. The notice stated that Orinda and the Funds requested the rescission of the exemptive order because “they are not presently relying on the [2012 exemptive order] and will not do so in the future.”