Popular Blog Post: SEC Charges Trustees, Adviser with Liquidity Rule Violations
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In its first case enforcing the Liquidity Rule that prohibits (in part) mutual funds from investing more than 15 percent of net assets in illiquid investments, last May the Commission announced charges against Pinnacle Advisors LLC for “aiding and abetting Liquidity Rule violations by a mutual fund it advised and whose Liquidity Risk Management Program it administered.” In addition, the Commission charged the fund’s two independent trustees and two officers with aiding and abetting Liquidity Rule violations. Pinnacle Advisors LLC agreed to settle charges with the SEC including a censure and disgorgement of $476,000. A third trustee settled charges with the SEC.
The complaint alleges from June 2019 to June 2020, the fund “held approximately 21 to 26 percent of its net assets in illiquid investments” well above the 15 percent threshold. The Commission’s complaint alleges Pinnacle Advisors and the two officers “classified the fund’s largest illiquid investment as a ‘less liquid’ investment, ignoring restrictions, transfer limitations, and the absence of any market for the shares, and disregarding the advice of fund counsel and auditors.” The complaint also alleges the trustees “aided and abetted the fund’s violation by recklessly failing to exercise reasonable oversight of the fund’s program” because the trustees knew that shares in question were restricted and illiquid. According to the Commission’s press release, it seeks “permanent injunctions and civil money penalties.” The fund itself is now a liquidating trust and was not charged in the matter.
The Commission also announced charges against Pinnacle Investments LLC for “making false and misleading statements in its Form ADV brochure regarding reviews of advisory client accounts and failing to disclose certain conflicts of interests, adopt and implement related policies and procedures, and deliver to clients required information about advisory personnel.”
UPDATE: In July, Pinnacle Advisors filed a motion to dismiss claiming the Commission’s accusation was “an exercise of government overreach.” In August, the Commission responded to Pinnacle’s motion to dismiss countering that the firm received fair notice regarding the application of the seven-year-old liquidity rule and that the rule is not “impermissibly vague.”
Click here to view the Commission’s press release on the Liquidity Rule charges against Pinnacle Advisors, the two officers, and two trustees.
Click here to view the Commission’s complaint against the adviser, officers, and trustees.