SEC Settlement Reminds Investment Advisers to Properly Disclose Securities Lending Practices

Conflicts of interest remain one of the key regulatory risks faced by investment advisers. See Ten Key Risks Facing Private Fund Managers in 2017” (Apr. 6, 2017). For more than a decade, two affiliated investment advisers recalled securities that had been loaned out by insurance-dedicated funds they advised so that the corporate shareholders in those funds – which included the advisers’ affiliated insurers – could take advantage of the deduction available for certain dividend income. The advisers allegedly failed to disclose this practice, however, to either the funds’ investors or their board of directors, thus creating an unaddressed conflict of interest that favored their affiliates at the expense of the funds they advised, which lost out on the securities lending income during the period when the securities were recalled. The advisers recently entered into a settlement with the SEC with respect to this behavior, agreeing to pay a significant amount in disgorgement, interest and penalties. This article details the securities lending practices that led to the enforcement action and the terms of the settlement order. For other enforcement actions involving conflicts of interest, see “SEC Settles Three Additional Enforcement Actions for Inadequate Share-Class Disclosure” (May 17, 2018); and “Ameriprise Settlement Reflects Continued SEC Focus on Conflicts of Interest and Retail Investors” (Apr. 19, 2018).

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