Published on Nov 13th, 2023 |

Failure to Provide Proper Disclosures Leads to $2.5 Million Penalty

SEC Releases

Brief Introduction

Recently, the SEC charged a well-known Investment Adviser for failures involving the description of investments within a Publicly Traded Fund it advised.

The Firm agreed to settle the charges with a $2.5 million penalty.

This recent charge highlights the importance of proper and thorough disclosures to the SEC.

What Happened?

What Happened?

  • The Investment Adviser to a Closed-End Management Company (“Trust”) failed to accurately describe the Trust’s investments.
    • The Investment Adviser was required to file publicly available annual and semi-annual reports to the SEC.
      • These reports included details about investment positions.
    • The Trust’s prospectus described its objectives as seeking high current income through fixed income securities that make up over 75% of its NAV.
  • In eight (8) reports from October 2015 to October 2019, the Investment Adviser described a Lending Facility (“LLC”) that the Trust made significant investments through, as being engaged in “diversified financial services”, which was inaccurately described.
    • The LLC developed print and advertised plans for films and funded distribution expenses for a rate of return from proceeds of the film.
    • Such a description was misleading because the company was engaged in a single line of business.
  •  In six (6) reports, the coupon rate to the LLC was incorrectly described.
    • Four (4) of those reports described the coupon rate as having an additional floating rate despite not having one.
    • The fifth report provided a composite rate that was less than the actual coupon rate of the investment.
    • The sixth report did not provide a composite rate, therefore understating the coupon rate.
  • The investment in the LLC was the only investment involving the movie industry, and, at times, it was its largest single position in the Trust’s portfolio.
  • The Investment Adviser’s cooperation and remedial acts were taken into consideration when the SEC accepted the offer to settle.

Vigilant's Conclusion

Vigilant’s Conclusion

It is vital for Firms to have detailed and accurate disclosures related to their investments, whether they be to investors, the SEC, or both.

Firms should have detailed policies and procedures in place to properly evaluate the descriptions of investments and the calculations of performance.

The preparation and on-going evaluation of disclosures can require significant resources, and many times dedicated compliance professionals can be a cost-effective solution.

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