(Article from Registered Funds Regulatory Update, July 2023
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The SEC recently settled charges against a registered investment adviser related to disclosure and policies and procedures violations involving two of the funds it advises.
In the first action, the Order found that, from April 2011 to November 2017, the adviser failed to waive approximately $27 million in advisory fees for a fund that primarily invested in other funds managed by the same adviser to avoid duplicative fees, as required by the advisory agreement, due to a formula error used to calculate the fee waiver amount. The Order noted that the adviser’s fee waiver calculations did not properly consider the fund’s use of leverage. Additionally, until at least 2018, the fund did not have adequate written policies and procedures to oversee advisory fee calculations and related fee waivers. The adviser has since disbursed to investors $27 million in fees that should have been waived, plus interest and a performance adjustment.
In the second action, the Order found that, from September 2014 to August 2016, the adviser failed to disclose material information to investors about its use of interest swaps for a listed closed-end fund it advised and the material impact of the swaps on the fund’s dividend. The adviser inadequately disclosed that certain paired interest rate swaps in the fund’s portfolio had become a material source of distributable income (no less than 24% of the fund’s distributions paid to shareholders in each month), which allowed the adviser to maintain the fund’s dividend rate. However, the continued use of interest rate swaps contributed to a decline in the fund’s NAV. According to the Order, the adviser failed to inform shareholders that a significant portion of the fund’s distributions came from the paired swap transactions, and that these transactions not only had a substantial risk of capital loss but also a negative effect on the fund’s NAV.
For the first action, the Order found that the adviser violated the anti-fraud and compliance provisions of the Advisers Act. In the second action, the Order found that the adviser violated the anti-fraud provisions of the Advisers Act and Section 34(b) of the Investment Company Act, which makes it unlawful for any person to make untrue statements of material fact, or omit material information necessary to make other statements not misleading, in any report or document filed under the Investment Company Act.
Without admitting or denying the SEC’s findings, the adviser agreed to a cease-and-desist order and censure in each action as well as a combined $9 million civil monetary penalty from both actions.
In the Matter of Pacific Investment Management Company LLC, SEC Admin. File No. 3-21489 (June 16, 2023), available at: https://www.sec.gov/litigation/admin/2023/ia-6328.pdf.
In the Matter of Pacific Investment Management Company LLC, SEC Admin. File No. 3-21490 (June 16, 2023), available at: https://www.sec.gov/litigation/admin/2023/ia-6329.pdf.