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SEC Sanctions Investment Adviser for Failure to Adhere to Fund's Stated Investment Objective

The SEC barred a mutual fund manager from the securities industry for failing to follow the investment objectives of the Z Seven Fund (Z7F), a mutual fund managed by Top Fund Management (TFM). TFM was an investment adviser that was registered with the SEC until 2011, and the manager was also its president and control person.

Z7F operated as a non-diversified, open-end investment company. The Z7F prospectuses and statements of additional information described the fund's investment objective as long-term capital appreciation and its principal investment strategy as investing, under normal market conditions, at least 80% of its total assets in common stocks and securities immediately convertible into common stocks of domestic and foreign issuers. The principal investment strategy made no mention of options, and none of the principal risks involved options. Furthermore, the fund had a fundamental policy that the fund could not purchase options other than for hedging purposes.

The SEC's order instituting settled administrative proceedings against the manager and TFM noted that TFM and the manager committed a large amount of the fund's assets to purchases of put options on stock index ETFs or stock index futures as high as 75% of net assets in 2010. The Z7F's options trading allegedly "went well beyond hedging and amounted to speculation because the quantity of put options purchased was incompatible with a hedging strategy when considering the size of the Z7F's equity portfolio." The SEC's order found that the manager and TFM willfully violated the antifraud provisions of the Securities Act, the Securities Exchange Act and the Advisers Act. The order also found that the manager and the Z7F violated Section 34(b) of the 1940 Act, which prohibits any person from making untrue statements of material fact in any prospectus or SAI.

Source: In the Matter of Top Fund Management, Inc. and Barry C. Ziskin, SEC Administrative Proceeding File No. 3-15154, December 21, 2012.

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume III, Number 103


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Godfrey & Kahn has one of the Midwest's largest investment management practices, with a team of attorneys dedicated solely to investment management clients. Our team offers a wide range of experience and includes attorneys who have worked at the SEC, held senior executive positions at national and international mutual fund groups and served as in-house counsel to companies within the investment management industry. This broad experience gives us the insight and understanding necessary to advise clients in the United States and abroad on the complex issues faced by investment management...