More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
Standard investment industry warnings about reading the prospectus would have done little good to investors in two Oppenheimer bond mutual funds, whose misleading statements cost the fund company $35 million in SEC sanctions.
According to an SEC investigation, OppenheimerFunds got caught on the wrong side of a bet on commercial mortgage-backed securities (CMBS) in the depths of the credit crisis in late 2008.
In findings announced Wednesday, the SEC said Oppenheimer used total return swaps (TRS) to gain leveraged exposure to CMBS in two of the company’s funds: the Oppenheimer Champion Income Fund, a high-yield bond fund, and the Oppenheimer Core Bond Fund, an intermediate-term bond fund.
“When declines in the CMBS market triggered large cash liabilities on the TRS contracts in both funds and forced Oppenheimer to reduce CMBS exposure, Oppenheimer disseminated misleading statements about the funds’ losses and their recovery prospects,” the SEC said in a release.
The release quotes SEC Associate Director Julie Lutz saying, “These Oppenheimer funds had to sell bonds at the worst possible time to raise cash for TRS contract payments and cut their CMBS exposure to limit future losses. Yet, the message that Oppenheimer conveyed to investors was that the funds were maintaining their positions and the losses were recoverable.”
The SEC’s order said the two funds assured financial advisors and fund shareholders that the funds only suffered paper losses and that absent bond defaults, the funds would continue to collect interest payments while awaiting a market recovery. But “these communications were materially misleading because the funds were committed to substantially reducing their CMBS exposure, which dampened their prospects for recovering CMBS-induced losses,” the SEC said. “Moreover, the funds had been forced to sell significant portions of their bond holdings to raise cash for anticipated TRS contract payments, resulting in realized investment losses and lost future income from the bonds.”
The SEC also faulted the Champion fund’s prospectus for inadequately disclosing the high-yield bond fund’s reliance on the leveraged total return swaps to the extent that “the fund’s total investment exposure could far exceed the value of its portfolio securities and, therefore, that its investment returns could depend primarily upon the performance of bonds that it did not own.”
Oppenheimer had no comment, but referred AdvisorOne to a statement in which the company said it neither admitted nor denied the SEC’s allegations. The statement quoted CEO Bill Glavin saying Oppenheimer was “pleased” with the settlement and was working to “enhance our fund disclosure, risk management and compliance controls.” Glavin added, “We attach the utmost importance to our regulatory obligations and our fiduciary duties to our advisory clients.”
In reaching the settlement with Oppenheimer, the SEC followed its longstanding policy of settling actions with securities firms neither admitting nor denying wrongdoing, a practice publicly criticized by U.S. Disctrict Court Judge Jed Rakoff.