Under the terms of the settlement, which was reached in cooperation with the Securities and Exchange Commission, RS has agreed to pay $11.5 million in restitution and disgorgement to injured investors, $13.5 million in civil penalties and $5 million in a reduction of fees charged to investors over a five-year period.
"RS managers and executives knew that arrangements with market timers were contrary to claims made in the company's prospectus and harmful to long-term investors," Spitzer said. "Despite this knowledge, company officials allowed and facilitated market timing of funds because it proved to be a lucrative source of fee revenues."
Market timing activity within the RS Emerging Growth Fund first came to the Attorney General's attention during the investigation of Canary Capital Partners in the summer of 2003. Since then, coordinated investigations by state and federal regulators revealed that RS entered into agreements with other market timers, including Canary, which allowed them to engage in improper, frequent short-term trading of shares of the RS fund at the expense of other fund shareholders.
The agreements that RS made with timers were not disclosed to long-term investors. Indeed, the prospectus for RS' s equity funds told investors that: "You may not exchange your investment more than four times in any 12-month period . . . ."
As part of the settlement, RS has agreed to implement significant corrective measures designed to create greater board and adviser accountability and to prevent the kinds of abuses that gave rise to this investigation.
These measures include designation of an independent board chairperson with no prior connection to the company or its affiliates; enhanced compliance and ethics controls; new disclosure to investors of expenses and fees, and a commitment to hire a full-time senior officer to ensure that fees charged by the funds are negotiated at arm's length and are reasonable.
RS, located in San Francisco, is a mutual fund adviser to ten mutual funds with a total of approximately $5 billion in assets under management as of the end of 2003.
The Attorney General's investigation was handled by Senior Enforcement Counsel Roger Waldman and Assistant Attorney General Verle Johnson, under the supervision of David Brown IV, Chief of the Attorney General's Investment Protection Bureau, with assistance provided by Economist Hampton Finer of the AG's Public Advocacy Division.
