First Charges Ever Filed by the SEC for Liquidity Requirement Violations
SEC Releases
Brief Introduction
On May 5th, the SEC charged a Firm $476,000 in disgorgement and civil penalties for aiding and abetting Liquidity Rule Violations by a Mutual Fund under its advisement.
Additionally, three trustees and two officers of the advisement company were charged related to the Liquidity Rule Violations.
This case is the first enforcement in history related to the Liquidity Rule for Mutual Funds.
Liquidity Rule Reminder
- Mutual Funds are prohibited from investing more than 15% of net assets in Illiquid Investments.
- Funds must have prompt remedial steps prepared if their percentage of Illiquid Assets goes above the cutoff.
- Funds must have a Liquidity Risk Management Program that assesses and mitigates Liquidity Risk.
What Happened?
According to the SEC:
- From June 2019 to June 2020, the Fund allegedly held 21-26% of its Funds in Illiquid Investments.
- The Investment Firm and its officers classified the Fund’s largest Illiquid Investment as a “less liquid” investment, ignoring restrictions, transfer limitations, and the absence of any market for the shares, and disregarding the advice of Fund Counsel and Auditors.
- The Firm did not present their Board with a mediation plan nor made any required filings with the SEC.
- Officers also misled the SEC’s Division Investment Management about the basis for Liquidity decisions.
- The Firm members who were expected to provide supervisory oversight recklessly failed to exercise reasonable oversight.
Vigilant’s Conclusion
We remind Firms that in an increasingly aggressive regulatory environment, it is prudent to be on the side of caution when evaluating one’s Policies and Procedures related to rules that have not yet been enforced historically.
Oversight requirements, the necessity of actionable Policies and Procedures, and the expectation of full transparency during investigation are all taken quite seriously by SEC investigations.
“On the Fly” compliance can lead to costly compliance failures that will undermine the success of Firms.
If you would like to take a proactive approach to compliance and have Vigilant evaluate your Policies and Procedures, please reach out to us today.