The Securities & Exchange Commission today announced charges against investment adviser Pinnacle Advisors LLC for aiding & abetting Liquidity Rule violations by a mutual fund it advised & whose Liquidity Risk Management Program it administered. The SEC also charged the fund’s two independent trustees, Mark Wadach & Lawton “Charlie” Williamson, & two officers of both Pinnacle Advisors & of the fund it advised, Robert Cuculich & Benjamin Quilty, with aiding & abetting Liquidity Rule violations by the fund. A third trustee, Joseph Masella, agreed to settle charges that he caused & willfully counseled the fund’s violations.
The action is the first-ever case enforcing the Liquidity Rule, which prohibits mutual funds from investing more than 15 percent of their net assets in illiquid investments, requires funds to take certain prompt remedial steps if they hold illiquid investments above this percentage limit, & requires funds to adopt a liquidity risk management program to assess their liquidity risk.
The SEC’s complaint alleges that, from June 2019 to June 2020, the fund held approximately 21 to 26 percent of its net assets in illiquid investments. According to the complaint, Pinnacle Advisors & its officers, Cuculich & Quilty, classified the fund’s largest illiquid investment as a “less liquid” investment, ignoring restrictions, transfer limitations, & the absence of any market for the shares, & disregarding the advice of fund counsel & auditors. The SEC alleges that Pinnacle Advisors & its officers did not present the fund’s board with a plan to reduce the fund’s illiquid investments to 15 percent or lower or make required filings with the SEC, as required by the Liquidity Rule. The complaint also states that Cuculich, Quilty, & Masella misled the SEC’s Division of Investment Management about the basis for the fund’s liquidity classifications. According to the complaint, the fund’s board had oversight responsibilities regarding the fund’s Liquidity Risk Management Program, & Wadach & Williamson, who knew that the shares were restricted & illiquid, aided & abetted the fund’s violation by recklessly failing to exercise reasonable oversight of the fund’s program.
“The Liquidity Rule provides substantive protections to shareholders of open-end funds,” said Sheldon L. Pollock, Associate Regional Director in the SEC’s New York Regional Office. “Trustees must exercise oversight on behalf of shareholder interests, & the Commission will hold trustees accountable when they fail to fulfill the most basic requirements under the applicable rules.”
The SEC’s complaint seeks permanent injunctions & civil money penalties. The fund is now a liquidating trust & is not separately charged.
Without admitting or denying the SEC’s findings, Masella consented to an order requiring him to cease & desist from violations of the Liquidity Rule & pay a civil penalty of $20,000, & suspending him from association with any investment adviser, registered investment company, & others for six months.
The SEC also announced charges against Pinnacle Investments LLC, an affiliate of Pinnacle Advisors, for making false & misleading statements in its Form ADV brochure regarding reviews of advisory client accounts & failing to disclose certain conflicts of interests, adopt & implement related policies & procedures, & deliver to clients required information about advisory personnel. Without admitting or denying the SEC’s findings, Pinnacle Investments consented to an order requiring it to cease & desist from violations of the antifraud & other provisions of the Investment Advisers Act of 1940, a censure, & disgorgement & a civil penalty totaling approximately $476,000.
The SEC’s investigation was conducted by Gwen Licardo, Andrew Sporkin, Dani Srour, & Lisa Knoop & was supervised by Hane L. Kim of the Retail Strategy Task Force & Mr. Pollock. Alex Lefferts of the Enforcement Division’s Office of Investigative & Market Analytics assisted with the investigation. The examination that led to the investigation was conducted by Anna Shmidt, Shari Singh, Lawrence Chinsky, Rachel Lavery, & Jennifer Klein of the Division of Examinations. The litigation will be handled by Todd Brody, Mr. Sporkin, & Ms. Srour.