Investment Adviser Settles SEC Charges for Misleading Investors on Tax Consequences of Switching Funds

An investment adviser settled SEC charges for materially misleading disclosures that failed to warn certain retail investors about the serious potential tax liabilities for switching funds.  

According to the Order, the adviser made it possible for investors to switch from an investor retirement fund to an institutional fund by lowering the minimum threshold for investing in the institutional fund from $100 million to $5 million. The SEC found that the adviser failed to adequately disclose that its recommendation would result in "historically larger capital gains distributions" for investors who held taxable accounts, because investors making the switch would have to first redeem the shares of the former, before investing in the latter. The SEC also found that the adviser did not adopt or implement policies to ensure accurate prospectus disclosures, despite being aware of the likely tax impact on retail investors holding mutual funds in taxable accounts. 

As a result, the SEC found that the firm violated SA Section 17(a)(2) ("Fraudulent Interstate Transactions"); IAA Section 206(4) ("Prohibited transactions by investment advisers") and Rules 206(4)-7 ("Compliance procedures and practices") and 206(4)-8 ("Pooled investment vehicles"); and ICA Section 34(b) ("Unlawful representations and names").

To resolve the charges, the firm agreed to (i) cease and desist from misleading disclosures; (ii) pay a $13.5 million civil penalty to be distributed to impacted investors; (iii) fund a remediation program totaling $92.91 million for harmed investors; and (iv) enhance internal compliance procedures.

This settlement resolves the SEC's investigation along with settlements of parallel investigations by New York, New Jersey and Connecticut on behalf of the North American Securities Administrators Association.