The Securities and Exchange Commission (SEC) charged a New York-based investment adviser and several mutual fund trustees with aiding and abetting violations of its Liquidity Rule—the agency’s first enforcement action related to the policy.
Pinnacle Advisors was charged for “aiding and abetting Liquidity Rule violations by a mutual fund it advised and whose liquidity risk management program it administered,” according to the SEC’s press release Friday. The agency’s complaint was filed in U.S. District Court for the Northern District of New York.
The SEC also charged the fund’s two independent trustees, Mark Wadach and Lawton Williamson, and two officers of both Pinnacle Advisors and the fund it advised, Robert Cuculich and Benjamin Quilty, with aiding and abetting Liquidity Rule violations.
A third trustee, Joseph Masella, agreed to settle charges he caused and willfully counseled the fund’s violations. Without admitting or denying the SEC’s findings, Masella consented to cease and desist from further violations of the Liquidity Rule; pay a civil penalty of $20,000; and a six-month bar from associating with any investment adviser, registered investment company, and others.
Pinnacle Investments, an affiliate of Pinnacle Advisors, also settled charges with the SEC without admitting or denying wrongdoing. The agency charged Pinnacle Investments with making false and misleading statements in its Form ADV brochure, as well as failing to disclose certain conflicts of interests, adopt and implement related policies and procedures, and deliver to clients required information about advisory personnel. Pinnacle Investments agreed to pay disgorgement and a civil penalty totaling approximately $476,000.
The details: Pinnacle Advisors allowed a mutual fund it controlled to invest between 21 and 26 percent of its funds in restricted shares of an unnamed medical device company in 2019 and 2020, which was above the 15 percent limit for such investments set by the Liquidity Rule, according to the SEC’s complaint.
The fund also failed to comply with “applicable reporting and filing requirements or to bring its position in the restricted shares of the medical device company under the 15 [percent] threshold as required by SEC rules,” the complaint said.
Pinnacle Advisors, Cuculich, and Quilty allegedly aided and abetted the fund’s violations of the Liquidity Rule by not classifying the medical device restricted shares as an illiquid investment, despite being advised to do so by the fund’s counsel. The fund’s counsel and auditors would resign over the issue, the SEC said in its complaint. The defendants also made misleading statements and omissions about the “improper classification” of the restricted shares to SEC staff and failed to submit timely reports to the fund’s board and the SEC, according to the agency.
Quilty, the chief executive officer of Pinnacle Investments, has served as Pinnacle’s chief compliance officer since 2013, the SEC noted.
Wadach and Williamson were “keenly aware” of the status of the restricted shares but continued to classify them as a “less illiquid” investments rather than an “illiquid,” also ignoring the advice of the fund’s counsel and auditors, the SEC said.
Neither Pinnacle Advisors nor Pinnacle Investments could be reached for comment.