SEC Finds Broker-Dealer and its Affiliates "Ineligible" to Service Mutual Funds
Commentary by Steven Lofchie
A broker-dealer and its affiliated investment advisers settled SEC charges for providing securities services to mutual funds in violation of the ineligibility provisions of the Investment Company Act.
According to the SEC Order, the broker-dealer and its affiliates acted as an investment adviser and principal underwriter to registered investment companies and employees' securities companies, despite a prior New Jersey state court finding that they had violated state securities law in connection with the sale of mortgage-backed securities. The SEC found that the broker-dealer and its affiliates "had not sought or obtained exemptive relief" under Investment Company Act Section 9(a) ("Ineligibility of certain affiliated persons and underwriters") in order to provide these services.
To settle the charges, the firm agreed to (i) cease and desist from further violations, (ii) accept a censure and (iii) pay over $10 million in disgorgement, prejudgment interest and civil penalties. The firm's remedial efforts, including the development of enhanced policies and procedures, were considered by the SEC in accepting the settlement offer.
Commentary
The ineligibility provisions of U.S. financial regulations are broad. It is often difficult for firms to keep track of the fact that violations as to a limited activity may disqualify the firm from wholly unrelated activities unless a waiver is obtained.