SEC Charges Mutual Fund Adviser with Improper Handling of Fund Assets and Selection of Brokers

The SEC charged Water Island Capital LLC, an investment adviser to several alternative mutual funds, with maintaining the funds' cash collateral at broker-dealer counterparties instead of at the funds' custodial bank.

During an SEC examination of Water Island Capital LLC, the SEC uncovered the firm's failure to ensure that roughly $247 million in cash collateral held by broker-dealer counterparties was maintained with the funds' custodial bank. The cash collateral, which Water Island caused to be posted, related to the funds' investments in certain total return and portfolio return swaps. Additionally, the SEC found that Water Island Capital failed to create a list of executing brokers and to maintain documentation on the monitoring of the funds' compliance with directed brokerage requirements, as required by the funds' policies.

See: SEC Order.