The Securities and Exchange Commission (SEC) announced charges against investment adviser Pinnacle Advisors for aiding and abetting Liquidity Rule violations by a mutual fund it advised and whose Liquidity Risk Management Program it administered. The SEC’s complaint seeks permanent injunctions and civil money penalties.
The action is the first-ever case enforcing the Liquidity Rule, which prohibits mutual funds from investing more than 15% 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 Liquidity Rule provides substantive protections to shareholders of open-end funds,” said Sheldon Pollock, associate regional director in the SEC’s New York Regional Office, in a statement. “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 also charged the fund’s two independent trustees 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. A third trustee, Joseph Masella, agreed to settle charges that he caused and willfully counseled the fund’s violations. 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, and suspending him from association with any investment adviser, registered investment company, and others for six months.
Without admitting or denying the SEC’s findings, Pinnacle Investments consented to an order requiring it to cease and desist from violations of the antifraud and other provisions of the Investment Advisers Act of 1940, a censure, and disgorgement and a civil penalty totaling approximately $476,000. The mutual fund is now a liquidating trust and is not separately charged.