According to the Commission’s Order, the investment adviser in this case placed its interest in making a profit ahead of the interests of the mutual funds it had a duty to serve. Investment advisers have a fiduciary duty to act in the best interests of the mutual funds they advise and the funds’ shareholders. In this case, the adviser recommended that the mutual funds contract with an affiliate of the adviser to serve as transfer agent without fully disclosing to the mutual funds’ boards that most of the actual work was to be done under a subcontract arrangement that respondents had negotiated with the mutual funds’ existing third party transfer agent at steeply discounted rates. Rather than passing the substantial fee discount on to the mutual funds, the respondents, through the affiliated transfer agent, took most of the benefit of the discount for themselves, reaping nearly $100 million in profit at the funds’ expense over a five year period.
In settling this action, the respondents consented, without admitting or denying the findings, to the Commission’s Order, which requires payment of $128 million in disgorgement and interest, $80 million in penalties and compliance with substantial remedial measures. The remedial measures include a requirement that, in the event a Citigroup affiliate intends to submit a proposal to serve as transfer agent for the mutual funds, the adviser to the funds must also seek competitive bids from transfer agents unaffiliated with Citigroup. The competitive bidding process will be overseen by an independent monitor, accountable only to the boards of the mutual funds, but paid for by the respondents. The disgorgement and penalties will be distributed pursuant to a plan of distribution.
Linda Chatman Thomsen, the Director of the Commission’s Division of Enforcement said, “Fund advisers owe a duty of undivided loyalty to the funds they serve. They cannot place their own interests above the funds’ interests, and they cannot hide the ball. They must disclose to the funds all material information regarding their compensation and the benefits they receive and all information regarding any conflicts of interest they may have.”
Mark K. Schonfeld, Director of the Commission’s Northeast Regional Office, added, “This was a substantial breach of fiduciary duty. The sanctions imposed on the respondents are appropriately severe and should send a strong message to investment advisers – this type of conduct will not be tolerated. In addition, the remedial measures imposed by the Order should help ensure that the Citigroup advisory entities will not engage in similar misconduct in the future.”
The Commission found that Respondents willfully violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, which prohibit registered investment advisers from employing devices, schemes or artifices to defraud clients or prospective clients and from engaging in transactions, practices, or courses of business that operated or would operate as a fraud or deceit upon clients or prospective clients.
The Commission’s investigation regarding the individuals involved is ongoing.
