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SEC Fines and Bars Fund Manager in Series Trust

The SEC fined and barred the portfolio manager of a registered mutual fund for failing to disclose to the Board and shareholders significant changes in investment strategy.  The fund operated as part of a platform series trust sponsored by a third party fund administrator that was responsible, along with the Board, for compliance oversight, although each adviser was responsible its own tailored compliance program.  As the SEC alleged, the PM altered the fund’s strategy and began investing the vast majority of assets in derivatives, which ultimately led to the fund’s demise.  Although the PM did ask for permission to invest in derivatives, he did not disclose that engaging in derivatives and short selling would become the principal investment strategy.    The SEC also accuses the respondent with failing to properly disclose the changes in investment strategy in the prospectus and shareholder reports and for causing the series trust’s Investment Company Act violations.

OUR TAKE: The SEC has wrestled with the allocation of compliance responsibility between series trust sponsors and boards and the underlying managers.  In this case, the SEC targets the manager for failing to ensure proper disclosure.  It is unclear at this writing whether the SEC will also charge the series trust or its board.

https://www.sec.gov/litigation/admin/2017/33-10448.pdf