In late November, the SEC announced fraud charges against an investment advisory firm and an individual portfolio manager for deceiving the trustees of a money market fund and failing to comply with the risk provisions of Rule 2a-7 under the 1940 Act. The SEC alleged that the adviser made false statements to the fund’s board regarding the credit risk and diversification of the portfolio and its exposure to European markets during the credit crisis in 2011.
The SEC also said that, given the fund’s failure to adhere to the risk limiting requirements of Rule 2a-7, the fund was not entitled to use the amortized cost method of valuing securities and should not have offered its shares at a stable $1 net asset value (NAV). Shareholders should have received a market-based, fluctuating NAV for purchases and redemptions of the fund’s shares, the SEC said.
The case arises from an ongoing analysis of money market fund data by the SEC’s Division of Investment Management, which identified the performance of this money market fund as consistently different from its peers. An investigation by the Division of Enforcement resulted in charges that the adviser and the portfolio manager misrepresented or withheld critical facts from the fund’s trustees, including:
- the adviser frequently exceeded self- imposed holding period restrictions for securities in the fund’s portfolio
- the fund regularly purchased securities with credit risk profiles that exceeded the firm’s guidelines for “minimal credit risk”;
- throughout the European credit crisis in 2011, the fund continually purchased securities issued by Italian-affiliated entities despite the portfolio manager’s claim that the adviser would unload even secondhand exposure to the Italian market; and
- The fund’s portfolio was not sufficiently diversified and thus had not reduced risk exposure as portrayed to trustees.