Investment Adviser Settles SEC Charges for Improper Pricing of Principal Trades

An investment adviser settled SEC charges for failing to reasonably determine and disclose the fair market value of principal trades with its advised funds during a period of significant market disruption.

According to the cease-and-desist Order, the firm originated senior loans and sold portions of those loans to its advised pooled investment vehicles. The firm’s advisory agreements and investor disclosures stated that these sales would be executed at "fair value" or "fair market value." However, during the onset of the coronavirus pandemic and severe disruptions in U.S. financial markets, the firm executed 143 loan sales to the funds at "par value less the unamortized loan fee." Despite internally acknowledging market uncertainty and widening interest rate spreads, the firm did not adjust its pricing to reflect the downward pressure on the loans. The SEC found that the firm failed to analyze the effect of the market disruption on the value of the loans, concluding that the firm "breached its fiduciary duty to the Funds and failed to act in accordance with the disclosures to investors."

The SEC also found that the firm continued to certify to a third-party independent review agent that the purchase prices reflected fair market value based on current market conditions.

As a result, the SEC charged the firm with violating IAA Section 206(2) and 206(4) ("Prohibited transactions by investment advisers"), as well as Rule 206(4)-8 ("Pooled investment vehicles"). 

The firm agreed to a cease-and-desist Order, a censure, and agreed to pay a civil money penalty totaling $900,000. The SEC said it took into consideration the firm's remedial efforts prior to the settlement, including voluntarily reimbursing the funds over $5.2 million, including interest, following an SEC staff examination.