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Series Trust Fund Manager Pays $10 Million for Ignoring Risk Limits

 

A mutual fund manager agreed to pay over $10 Million to settle charges that it did not observe its own risk management practices, which ultimately resulted in the fund losing 20% of its value.  The fund, part of a larger series trust and converted from a private fund in 2013, invested in S&P 500 index futures contracts.  The fund’s marketing materials described significant risk management procedures that would limit downside through hedged positions and stop-loss triggers.  The SEC alleges that the portfolio manager ignored the risk mitigation limits and that the CEO failed to supervise him.  The SEC charges several violations of the Advisers Act including the antifraud provisions.  A federal lawsuit continues against the portfolio manager, and the CFTC also settled charges with the respondents.

Don’t allow your portfolio managers to play regulatory Jenga.  Very often, former private fund managers have a hard time abiding by the strictures imposed by the Advisers Act and the Investment Company Act.  Firms should impose heightened supervision and training to ensure that hedge fund PMs understand the limitations. 

Clearing Agency Fined $20 Million for Inadequate Policies and Procedures

 

The sole registered clearing agency for exchange listed option contracts agreed to pay $20 Million in fines to the SEC and the CFTC for failing to adopt and implement reasonable policies and procedures.  The regulators allege that the clearing agency, an SRO designated as a systemically important financial market utility under the Dodd-Frank Act, did not adopt or enforce reasonable policies and procedures related to margin, credit exposure, risk management, and information security.  Also, the firm failed to obtain required approval  for changes in core risk management policies.  In addition to the fines, the respondent agreed to retain an independent compliance auditor and implement a series of board and executive level risk management oversight mechanisms.

The regulators can impose significant fines and penalties for failures to implement required policies and procedures without alleging any underlying loss or harm to investors.  The failure to implement required risk management and compliance policies can itself serve as the predicate for an enforcement action.