Compliance
SEC Charges Advisory Firms, Portfolio Managers For Roles In Collapse Of Midwest-Based Fund
The Securities and Exchange Commission has charged two investment advisory firms and two portfolio managers for failing to adequately inform investors about the riskiness of a fund they managed.
The Fiduciary/Claymore Dynamic Equity Fund (HCE), a closed-end fund, attempted two strategies to enhance returns, involving writing out-of-the money put options and shorting variance swaps, according to the SEC's investigation. This exposed HCE to "additional undisclosed risks" and caused the fund to lose over $45 million - some 45 per cent of its net assets - in September and October 2008. The fund liquidated in 2009.
Linked to this, Lisle, IL-based Claymore Advisors, the fund's advisor and administrator, and the sub-advisor responsible for managing HCE's portfolio, St Louis, MO-based Fiduciary Asset Management, have agreed to settle the authority's charges.
"Claymore has established a plan to distribute up to $45 million to fully compensate investors for losses related to the problematic trading," the SEC said in a statement.
Meanwhile, FAMCO has agreed to pay an additional $2 million in disgorgement and penalties. The SEC's case continues against former FAMCO employees: Mohammed Riad of Clayton, MO, and Kevin Swanson of St Louis, MO.
"When discussing fund performance and risks, fund advisors must candidly and accurately portray how the fund is being managed. The disclosures in this case fell short of the mark," said Robert Burson, senior associate regional director of the SEC's Chicago, IL, office.
The SEC's investigation was conducted by the Chicago office and the enforcement division's structured and new products unit that focuses on derivatives and other complex financial products.
"Derivatives have the potential to vastly increase the amount of leverage and exposure for a fund. HCE was exposed to substantial undisclosed risks as a result of its use of these complex financial instruments, and investors weren't sufficiently told," added Kenneth Lench, chief of the SEC enforcement division's structured and new products unit.
Overall, investors in HCE lost around $45.4 million as a result of risky trading, while the fund lost $70 million in total, 72.4 per cent of its net asset value, the authority said.
