The SEC brought its first action for misleading and obstructing the work of a CCO this week, finding that a portfolio manager deliberately altered documents and misled the firm’s CCO in an attempt to hide violations of the adviser’s code of ethics.
Rule 17j-1(d) under the Investment Company Act requires that employees of an adviser that have access to a fund’s portfolio must timely submit reports regarding their personal trading in securities held or to be acquired by the fund. Registered investment advisers must adopt a code of ethics, which must include policies for compliance with Rule 17j-1. In this case, consistent with best practices, the adviser required that portfolio managers pre-clear their personal securities trades.
The SEC said that the portfolio manager failed to pre-clear or report hundreds of personal securities transactions, including transactions held in certain funds managed by the adviser. The SEC also said that the portfolio manager submitted false quarterly and annual reports, falsely certified his annual compliance with the firm’s code of ethics and took active steps to conceal his trading. The SEC sanctioned the portfolio manager for violations of Rule 17j-1.
Of greater significance, however, is that we believe this is the first time that the SEC has brought an action under Rule 38a-1(c) under the Investment Company Act, which prohibits an officer, director or employee of a fund or its investment adviser, from directly or indirectly taking any action to coerce, manipulate, mislead or fraudulently influence a fund’s CCO in the performance of her duties. The SEC found that the portfolio manager’s actions resulted in a violation of Rule 38a-1(c).
CCOs of funds and their investment advisers will welcome this action, since it demonstrated that the SEC takes seriously the role of the CCO as a critical gatekeeper in ensuring that funds and advisers comply with their obligations under the securities laws. The SEC is saying, in essence, “we’ve got your back.”