(Article from Registered Funds Regulatory Update, July 2023
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The SEC charged Pinnacle Advisors LLC, a registered investment adviser, for aiding and abetting Liquidity Rule violations by a mutual fund it advised and whose Liquidity Risk Management Program it administered. The SEC also charged the fund’s two independent trustees, Mark Wadach and Lawton Williamson, and two officers of both Pinnacle Advisors and of the fund it advised, Robert Cuculich and Benjamin Quilty, with aiding and abetting Liquidity Rule violations by the fund. A third trustee, Joseph Masella, agreed to settle charges that he caused and willfully counseled the fund’s violations.
The action is the first-ever case enforcing the Liquidity Rule, which prohibits mutual funds from investing more than 15 percent of their net assets in illiquid investments, requires funds to take certain prompt remedial steps if they hold illiquid investments above this percentage limit, and requires funds to adopt a liquidity risk management program to assess their liquidity risk.
The SEC’s Complaint alleges that, from June 2019 to June 2020, the fund held approximately 21 to 26 percent of its net assets in illiquid investments. According to the Complaint, Pinnacle Advisors and its officers, Cuculich and Quilty, classified the fund’s largest illiquid investment as a “less liquid” investment, ignoring restrictions, transfer limitations, and the absence of any market for the shares, and disregarding the advice of fund counsel and auditors. The SEC alleges that Pinnacle Advisors and its officers did not present the fund’s board with a plan to reduce the fund’s illiquid investments to 15 percent or lower or make required filings with the SEC, as required by the Liquidity Rule. The Complaint also states that Cuculich, Quilty, and Masella misled the SEC’s Division of Investment Management about the basis for the fund’s liquidity classifications. According to the Complaint, the fund’s board had oversight responsibilities regarding the fund’s Liquidity Risk Management Program, and Wadach and Williamson, who knew that the shares were restricted and illiquid, aided and abetted the fund’s violation by recklessly failing to exercise reasonable oversight of the fund’s program.
The Complaint seeks permanent injunctions and civil money penalties. The fund is now a liquidating trust and is not separately charged.
Without admitting or denying the SEC’s findings, Masella consented to an order requiring him to cease and desist from violations of the Liquidity Rule and pay a civil penalty of $20,000, and suspending him from association with any investment adviser, registered investment company, and others for six months.
The SEC also announced charges against Pinnacle Investments LLC, an affiliate of Pinnacle Advisors, for making false and misleading statements in its Form ADV brochure regarding reviews of advisory client accounts and failing to disclose certain conflicts of interests, adopt and implement related policies and procedures, and deliver to clients required information about advisory personnel. Without admitting or denying the SEC’s findings, Pinnacle Investments consented to an order requiring it to cease and desist from violations of the antifraud and
other provisions of the Investment Advisers Act of 1940, a censure, and disgorgement and a civil penalty totaling approximately $476,000.
Complaint, SEC v. Pinnacle Advisors, LLC, et al., Civil 5:23-cv-547-FJS-ATB (N.D. NY. May 5, 2023) , available at: https://www.sec.gov/litigation/complaints/2023/comp-pr2023-90.pdf.
In the Matter of Joseph Masella, SEC Admin Proc. File No. 3-21406 (May 5, 2023), available at: https://www.sec.gov/litigation/admin/2023/ia-6303.pdf.
In the Matter of Pinnacle Investments, LLC, SEC Admin Proc. File No. 3-21405 (May 5, 2023), available at: https://www.sec.gov/litigation/admin/2023/34-97448.pdf.