An investment adviser settled SEC charges for failing to adopt reasonably designed policies with respect to the holding period for a volatility-linked exchange-traded product ("ETP") held in advisory clients' accounts.
According to the Order, the ETP was not meant as a buy-and-hold investment and its value was likely to decrease when held for extended periods. Although the adviser placed certain restrictions on sales of the ETP and adopted a concentration limit on volatility-based ETPs, the SEC found that the adviser did not place adequate restrictions on the use of the ETP in discretionary managed accounts and failed to implement a system to enforce the concentration limit. The SEC also found that certain of the investment adviser's financial advisers did not adequately understand the risks associated with the ETP and held the ETP in client accounts for extended periods, which resulted in meaningful losses to the clients' ETP investments.
As a result, the SEC determined that the adviser violated IAA Section 206(4) ("Prohibited Transactions") and IAA Rule 206(4)-7 ("Compliance procedures and practices") thereunder.
To settle the charges, the firm agreed to (i) cease and desist from future violations, (ii) a censure, (iii) disgorgement in the amount of $96,344 plus prejudgment interest of $15,930 and (iv) an $8 million civil monetary penalty.
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