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SEC Reaches Settlements with Two Registered Investment Advisers Regarding Improper Cross Trades

The SEC recently announced that it had settled charges with two investment advisers in connection with alleged violations of Section 17(a) of the Investment Company Act of 1940 relating to improper cross trades.

On September 14, 2018, the SEC announced that it had settled an enforcement action against Cushing Asset Management, L.P. relating to allegations that, in 2012, Cushing, on behalf of a hedge fund it managed, sold units of a publicly-traded MLP valued at approximately $33.5 million to two registered funds it also managed in an improper cross trade. According to the order, to execute the trade, Cushing traders contacted two separate brokers and placed corresponding buy and sell orders for the same number of units. These trades resulted in the firm’s clients incurring $125,000 in brokerage fees. The SEC alleged that these transactions constituted cross trades, and that Cushing caused the hedge fund to knowingly sell securities to the affiliated registered funds in violation of Section 17(a)(1) of the 1940 Act. Without admitting or denying the foregoing, in settlement of the allegations, Cushing agreed to cease and desist from violating Section 17(a)(1) and to pay a civil penalty of $100,000. 

On September 27, 2018, the SEC announced that it had settled an enforcement action against Putnam Investment Management, LLC and a former Putnam portfolio manager relating to allegations that, over a four-year period, Putnam and the portfolio manager facilitated dozens of improper cross trades that disadvantaged certain clients. The SEC alleged that, between 2011 and 2015, the portfolio manager pre-arranged with broker-dealers to temporarily sell mortgage-backed securities owned by one Putnam advisory account and to repurchase them the next day at a small mark-up for another Putnam advisory account. The securities were sold at the bid, rather than at an average between the highest current independent bid and the lowest current independent offer as required by applicable rules. This caused Putnam to favor the buyers in the transactions over the sellers. The SEC alleged that Putnam and the portfolio manager caused Putnam clients to engage in improper cross trades in violation of Sections 17(a)(1) and 17(a)(2) of the 1940 Act. The SEC also alleged that Putnam and the portfolio manager violated antifraud provisions of the Investment Advisers Act of 1940 and that Putnam failed to adopt and implement adequate procedures to ensure compliance with cross trading rules and failed to reasonably supervise the portfolio manager. Without admitting or denying the foregoing, Putnam and the portfolio manager agreed to cease and desist from violating applicable provisions of the federal securities laws and to pay civil penalties of $1 million and $50,000, respectively. 

The order for Cushing Asset Management is available at: https://www.sec.gov/litigation/admin/2018/ic-33226.pdf

The order for Putnam Asset Management is available at: https://www.sec.gov/litigation/admin/2018/ia-5050.pdf

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Vedder Price P.C. attorneys provide a full range of services to a diverse financial services clientele. Attorneys practicing in the firm’s Investment Services Group are experienced in all aspects of investment company and investment adviser securities regulations, broker-dealer regulatory and compliance matters, derivatives and financial product matters, and ERISA and tax matters. Clients include mutual fund complexes, hedge and other private funds, money managers, broker-dealers, independent directors, and many other types of institutions such as banks, savings and loans,...

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