SEC Charges Investment Adviser and Fund Trustees with Liquidity Rule Violations
The Securities and Exchange Commission on Friday, May 5, 2023, charged investment adviser Pinnacle Advisors LLC for aiding and abetting Liquidity Rule violations by a mutual fund it advised and whose Liquidity Risk Management Program it administered. The SEC also charged the fund's two independent trustees, Mark Wadach and Lawton "Charlie" Williamson, and two officers of both Pinnacle Advisors and of the fund it advised, Robert Cuculich and Benjamin Quilty, with aiding and abetting Liquidity Rule violations by the fund.
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, and 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 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, and disregarding the advice of fund counsel and auditors. 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. The complaint also states that Cuculich and Quilty 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, and Wadach and Williamson, who knew that the shares were restricted and illiquid, aided and abetted the fund's violation by recklessly failing to exercise reasonable oversight of the fund's program.
The SEC's complaint, filed in the Northern District of New York, alleges that Pinnacle Advisors, Cuculich, and Quilty aided and abetted the fund's violations of Rules 22e-4(b)(1) and 30b1-10 under the Investment Company Act of 1940, and that Wadach and Williamson aided and abetted the fund's violations of Rule 22e-4(b)(1) under the Investment Company Act. The complaint seeks permanent injunctions and civil money penalties. The fund is now a liquidating trust and is not separately charged.
The SEC's investigation was conducted by Gwen Licardo, Andrew Sporkin, Dani Srour, and Lisa Knoop and was supervised by Hane L. Kim of the Retail Strategy Task Force and Mr. Pollock. Alex Lefferts of the Enforcement Division's Office of Investigative and Market Analytics assisted with the investigation. The examination that led to the investigation was conducted by Anna Shmidt, Shari Singh, Lawrence Chinsky, Rachel Lavery, and Jennifer Klein of the Division of Examinations. The litigation will be handled by Todd Brody, Mr. Sporkin, and Ms. Srour.
Read the original litigation release from the U.S. Securities and Exchange Commission here.Click Here to Follow SEC Alerts