The Securities and Exchange Commission (SEC) has charged Pinnacle Advisors for aiding and abetting liquidity rule violations by a mutual fund it advised and whose liquidity risk management program the company administered.
In addition, the SEC charged the fund’s two independent trustees, Mark Wadach and Lawton “Charlie” Williamson, as well as two officers of both Pinnacle Advisors, Robert Cuculich and Benjamin Quilty, with aiding and abetting liquidity rule violations by the fund. A third trustee, Joseph Masella, agreed to settle charges.
This is the first-ever case enforcing the so-called liquidity rule, which prohibits mutual funds from investing more than 15 percent of their net assets in illiquid investments. It also requires funds to take certain prompt remedial steps if they hold illiquid investments above this percentage limit and requires funds to adopt a liquidity risk management program to assess their liquidity risk.
The complaint alleges that, from June 2019 to June 2020, the fund held approximately 21 to 26 percent of its net assets in illiquid investments. The SEC alleges that Pinnacle Advisors and its officers, Cuculich and Quilty, 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. They also allegedly disregarded the advice of fund counsel and auditors.
Further, the SEC alleges that Pinnacle Advisors and 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.
In addition, the SEC said that Cuculich, Quilty, and Masella misled the SEC’s Division of Investment Management about the basis for the fund’s liquidity classifications. The complaint also said that the fund’s board had oversight responsibilities of its Liquidity Risk Management Program. Wadach and Williamson, who knew that the shares were restricted and illiquid, aided and abetted the fund’s violation by failing to exercise reasonable oversight of the fund’s program, the SEC alleges.
“The Liquidity Rule provides substantive protections to shareholders of open-end funds,” Sheldon Pollock, associate regional director in the SEC’s New York Regional Office, said. “Trustees must exercise oversight on behalf of shareholder interests, and 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 and civil money penalties. Masella consented to an order requiring him to cease and desist from violations of the Liquidity Rule and pay a civil penalty of $20,000. Also, he was suspended from association with any investment adviser, registered investment company, and others for six months.
The SEC also announced charges against Pinnacle Investments, an affiliate of Pinnacle Advisors, for making false and misleading statements in its Form ADV brochure regarding reviews of advisory client accounts, among other charges. Pinnacle Investments consented to an order requiring it to cease and desist from violations of the antifraud and other provisions, a censure and disgorgement, and a civil penalty totaling approximately $476,000.