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Monthly Archives: October 2013

SEC Administrative Proceeding Related to UBS Puerto Rico Closed End Funds

On October 29, 2013, an Administrative Law Judge dismissed proceedings against two UBS employees against whom the SEC brought Cease-and-Desist Proceedings.  The SEC’s claims were based upon alleged federal securities law violations in connection with closed-end funds created and marketed by UBS.  All of the closed-end funds invested in Puerto Rico municipal debt.  Ironically, the 13 day hearing and post-hearing briefing ended March 15, 2013, five months before the collapse of the closed-end funds that were at issue in the case.  Between August and September 2013, these closed-end funds collapsed, realizing the fears that formed the basis of the SEC’s contentions.  Fortunately for UBS’s clients, the Administrative Law Judge’s opinion left a valuable breadcrumb trail detailing the material information that UBS failed to disclose to its clients, and at times, its own employees.  Equally important is that the breadcrumb trail reveals some information that was available to UBS employees, which information should have been passed on to firm clients. 

The UBS Puerto Rico Closed End Funds were, effectively, hot potatoes.  For those unlucky enough to still be holding the hot potatoes in August and September 2013, they at least have FINRA arbitration as an available tool to help them recover their losses. 

SEC Sanctions Nebraska-Based Investment Adviser for Best Execution Failures in Selecting Mutual Fund Share Classes

On October 2, 2013, the SEC announced that it had sanctioned an Omaha, Nebraska based investment advisory firm and its owner for failing to seek the most beneficial terms reasonably available when investing in mutual fund shares for three funds that they managed. 

An SEC investigation found that Manarin Investment Counsel Ltd. and Roland R. Manarin violated their obligation to seek what is known as “best execution” by consistently selecting higher cost mutual fund shares for the three fund clients even though cheaper shares in the same mutual funds were available.  As a result, the clients paid avoidable fees on their mutual fund holdings, which were passed through to a brokerage firm owned by Manarin in a practice inconsistent with the disclosures they made to investors.  The brokerage firm is also charged with violations.

Manarin and his firms agreed to pay more than $1 million to settle the charges.

According to the SEC’s order instituting settled administrative proceedings, Manarin Investment Counsel provided investment advice to a mutual fund called Lifetime Achievement Fund (LAF) as well as two private funds known as Pyramid I Limited Partnership and Pyramid II Limited Partnership.  As “funds-of-funds” they invested their assets principally in the shares of various mutual funds. 

The SEC’s order found that from 2000 to 2010, Manarin and his investment advisory firm caused these fund clients to invest in “Class A” mutual fund shares when they were eligible to own lower-cost “institutional” shares in the same mutual funds.  Because they owned “Class A” shares, the clients paid ongoing 12b-1 fees on their mutual fund holdings for distribution and shareholder services.  Such fees often could have been avoided had Manarin and his firm purchased institutional shares on the clients’ behalf.  Instead, the unnecessary fees were passed through to Manarin’s broker-dealer Manarin Securities Corp.  Although Manarin’s brokerage firm eventually refunded 12b-1 fees paid by LAF, it did not refund fees to the Pyramid funds.  From June 2000 to October 2010, Manarin Securities Corp. received approximately $685,000 in 12b-1 fees from mutual funds in which the Pyramid funds could have purchased institutional shares.

According to the SEC, by failing to seek best execution when selecting among available mutual fund share classes, Manarin and his investment advisory firm violated their fiduciary duty as investment advisers under Section 206(2) of the Investment Advisers Act of 1940.  Because their ongoing practice was inconsistent with disclosures in LAF’s registration statement and the offering memoranda for the two Pyramid funds, the order finds that Manarin and his investment advisory firm violated Section 206(4) of the Advisers Act and Rule 206(4)-8.  The SEC’s order also finds that Manarin violated Section 34(b) of the Investment Company Act of 1940, and that he and both firms violated Section 17(a)(2) of the Securities Act of 1933.  The SEC’s order further finds that Manarin’s brokerage firm charged commissions to LAF that exceeded the usual and customary amounts charged by broker-dealers for transactions in shares of exchange-traded funds – in violation of Section 17(e)(2)(A) of the Investment Company Act. 

Manarin and his brokerage firm agreed to pay disgorgement of $685,006.90 and prejudgment interest of $267,741.72.  Manarin agreed to pay a $100,000 penalty.  Without admitting or denying the SEC’s findings, Manarin and his firms also consented to censures and cease-and-desist orders.