Investment Advisers Settle SEC Charges For Breaches Of Duty To Advised Funds

Two investment adviser subsidiaries settled SEC charges for failing to disclose conflicts of interest and making misleading disclosures to funds they advised.

According to the SEC, Prudential Financial Inc. ("Prudential") subsidiaries AST Investment Services, Inc. ("AST") and PGIM Investments LLC ("PGIM") reorganized their funds in a way that provided Prudential with "tens of millions" of dollars in tax benefits, but that adversely impacted the funds. The subsidiaries were charged with failing to disclose conflicts of interest that resulted from the reorganization to the funds. The SEC also alleged that AST and PGIM failed to reimburse the funds for higher taxes in certain foreign jurisdictions, as promised.

The SEC's Order credited AST and PGIM for self-reporting their conduct, cooperating with the SEC staff's investigation and voluntarily returning funds of approximately $155 million. To settle the SEC charges, AST and PGIM agreed to (i) a censure, (ii) disgorge an additional $27.6 million, (iii) pay a civil monetary penalty of $5 million, and (iv) cease and desist from further violating SEC rules.

Commentary

This case is an interesting data point in evaluating the benefits of self-reporting to the SEC. Although AST and PGIM are still disgorging a significant amount, the small size of the additional penalty is likely due to the self-reporting of the violations (although they had initially failed to do so during an examination). When viewed in context of over $180 million in disgorgement, $5 million is a small penalty for the conduct here. While it is impossible to say whether the SEC would have discovered the alleged violations if the advisors had not turned themselves in, it certainly appears that the advisers received significant credit for self-reporting.

Primary Sources

1. SEC Order: AST Investment Services, Inc. and PGIM Investments LLC
2. SEC Press Release: SEC Charges Prudential Subsidiaries for Misleading Funds They Advised, Generating Tens of Millions in Tax Benefits for Prudential

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