Enforcement Action Reveals Shoddy Reporting to Board
The SEC recently announced settled charges against Franklin Advisers, Inc. for breaching its fiduciary duty to its client funds and failing to follow its own policies and procedures, and settled charges against Franklin Advisers and Toronto-based Franklin Templeton Investments Corp., for causing client funds to violate investment limitations. According to the SEC’s order, from October 2013 to November 2015, both Franklin Advisers and Franklin Templeton Investments purchased certain ETFs on behalf of client funds, causing the funds to exceed the limits set forth in the 1940 Act, which prohibits investing more than 10% of an investment company’s assets in other investment companies or acquiring in excess of 3% of the outstanding shares of an investment company. The SEC also found that, in November 2015, Franklin Advisers sold shares of certain ETFs held by its client funds in order for the funds to come into compliance with the limitations, causing certain client funds to suffer more than $2 million in losses. The SEC found that Franklin Advisers did not reimburse its client funds for these losses, contrary to its trade error policy. The SEC also found the adviser did not disclose the violations of its trade error policies and others to the funds’ board. The SEC pointed out, for example, the adviser’s decision not to reimburse certain funds for losses resulting from the corrective sales of ETFs assets created a conflict of interest, which was not disclosed to the funds’ board. The adviser later orally communicated trade error policy violations at a board meeting, however the adviser omitted reference to key information including losses incurred by the fund, conflicts of interests, or that the adviser had not followed its policies and procedures. Without admitting or denying the SEC’s findings, Franklin Advisers consented to a cease-and-desist order, a censure and a civil penalty of $250,000, and Franklin Templeton Investments consented to a cease-and-desist order and a civil penalty of $75,000.