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Category: NAV error

Fund Administrator Pays for Client’s Fraud

A fund administrator agreed to pay over $560,000 to settle charges that it caused its client’s violations of the Advisers Act’s antifraud provisions.  The client defrauded clients (and ultimately went to prison) for misappropriating client assets by creating fake loans in which the fund invested.  The fund’s custodian declined to book the fake loans because they lacked sufficient backup documentation.  Regardless, the administrator included the loans in the fund’s NAV even though, according to the SEC, it knew that the custodian excluded the loans.  The SEC faults the administrator for failing to further investigate, notify the board or shareholders, or exclude the loans from the NAV calculation.

OUR TAKE: Although it may be a legal stretch to assert that a fund administrator caused a fraudulent client’s illegal conduct, the SEC will hold securities markets gatekeepers accountable for their client’s behavior.  Service providers must conduct due diligence before accepting a client or risk being found guilty by association.


ETF Sponsor Will Pay $20 Million to Settle Charges it Overstated Performance

Doing a Number on REITs

The manager of a large bond ETF agreed to pay nearly $20 Million, including an $18.3 Million penalty, for mis-pricing securities and presenting an incorrect NAV to the Board, investors, and prospects.  The SEC charges that the firm inflated reported performance by purchasing odd lot non-agency MBS at a discount but using the higher round lot prices for valuation purposes.  The SEC asserts that several people knew about the strategy but failed to ensure that the firm accurately priced the securities.  The SEC faults the firm for making misrepresentations to the Board as well as in shareholder reports and marketing materials.  In addition to disgorgement and penalties, the respondent agreed to retain an independent compliance consultant.  The SEC’s Enforcement Director admonished, “Investment advisers must accurately describe the significant sources of performance and the strategies being used.”

OUR TAKE: When performance looks too good to be true, it probably is.  Outperformance in and of itself is a compliance red flag that should draw increased scrutiny.


Mutual Fund Firm to Pay Nearly $22 Million to Fix NAV Errors


A large mutual fund firm agreed to reimburse investors approximately $18 Million and pay a $3.9 Million fine for failing to properly remediate NAV pricing errors.  According to the SEC, the respondent discovered that its fair valuation process under-valued certain illiquid securities over a 30-month period by failing to include required inputs.  The firm attempted remediation by contributing $27 Million to the funds.  However, the SEC argues that the contribution failed to examine the impact to every shareholder and ultimately understated the impact to investors.  The SEC faults the firm for failing to follow its own fair valuation and NAV error correction policies in violation of the Advisers Act and the Investment Company Act.

OUR TAKE: There is no easy way to correct NAVs over an extended period of time.  Re-processing trades is expensive and time-consuming and can lead to fairly significant reimbursement checks.  However, trying to shortcut the remediation only leads to bigger problems, such as public enforcement actions.  The compliance lesson is to work very diligently on the fair valuation process.