Vedder Price

Vedder Thinking | Articles SEC Settles Charges Against Two Advisers Relating to Variable Insurance Portfolios


Reader View

On September 16, 2019, the SEC announced that it had settled administrative proceedings against two affiliated investment advisers for allegedly failing to disclose certain conflicts of interest and making misleading disclosures to the boards of trustees of certain mutual funds they advise relating to (1) the funds’ securities lending practices and (2) promised reimbursements for certain foreign taxes. The funds in question serve as investment options for variable annuity and variable life insurance contracts sponsored by insurance companies affiliated with the advisers. According to the SEC, the organization's tax department directed the funds’ affiliated securities lending agent to recall securities on loan from the funds in advance of the securities’ dividend record dates, solely to preserve the character of the dividends for tax purposes, which benefited the advisers and the affiliated insurance companies but resulted in lost securities lending revenue and investment income for the funds. The SEC alleged that the advisers failed to identify, or took inadequate steps to address, the conflict between the advisers and the funds, noting that at no time between 2005 and 2015 were compliance personnel consulted on the recall practice. The SEC also alleged that the advisers represented to the funds’ boards of trustees that they would reimburse the funds for additional taxes or other adverse effects resulting from the funds’ changes in tax status from regulated investment companies (RICs) to partnerships for U.S. federal income tax purposes—a conversion proposed by the advisers in 2005. However, by March 2018, according to the SEC, the advisers owed the funds more than $58.6 million in past-due foreign tax reimbursements, and the funds did not receive approximately $25 million in additional investment income they would have earned on that revenue had it been paid when due. Without admitting or denying the allegations, the two advisers agreed to be censured; to cease and desist from future violations; to disgorge over $27.6 million; and to pay a $5 million civil penalty. The SEC order recognized that the advisers self-reported the conduct to the SEC, cooperated with the staff's investigation and previously reimbursed over $155 million to the funds. Read the SEC order here.


Jacob C. Tiedt


John S. Marten


Nathaniel Segal


David W. Soden