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Financial Planning > Charitable Giving > Donor Advised Funds

SEC Fines Prudential Units for Misleading Fund Boards

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Prudential sign (Photo: Douglas C. Pizac/AP) (Photo: Douglas C. Pizac/AP)

The Securities and Exchange Commission charged two subsidiaries of Prudential Financial Inc. on Monday with failing to disclose conflicts of interest and making misleading disclosures to the boards for 94 insurance-dedicated funds they advised.

The subsidiaries, AST Investment Services Inc. and PGIM Investments LLC (PI), served as investment advisors to the funds.

They were ordered to pay a civil monetary penalty of $5 million and disgorge $27.6 million, in addition to $155 million they have already voluntarily reimbursed.

In 2006, the funds were converted from being taxed as regulated investment companies (RICs) to partnerships for federal income tax purposes so that Prudential Financial and its affiliates could receive certain tax benefits; however, the benefits came with negative consequences to the funds, according to the SEC’s complaint.

The 94 series funds were offered through the Advanced Series Trust and The Prudential Series Fund, which are open-end series trusts that served as investment vehicles for participating insurance companies writing variable annuity and variable life insurance contracts.

First, the complaint states, AST and PI cost the funds tens of millions of dollars in interest income when they temporarily recalled securities the funds had out on loan, the complaint states.

“AST and PI did not disclose, to the funds’ boards of trustees or the beneficial owners of the funds’ shares, the conflict of interest between Prudential and the funds in connection with the recalls.”

Second, the funds’ reorganization subjected them to less favorable tax treatment in certain foreign jurisdictions, but Prudential did not timely reimburse the funds for resulting losses despite AST and PI’s assurances it would do so, the SEC said.

“Investment advisers must be vigilant in monitoring for conflicts related to actions taken by affiliates, and must act consistently with their representations to their clients.” said Dabney O’Riordan, co-chief of the SEC Enforcement Division’s Asset Management Unit. “Here, AST and PI acted to benefit their parent company despite the costs those acts imposed on their clients.”

The complaint also states that Prudential and its affiliates “failed to disclose the conflict of interest between Prudential and the funds resulting from the recall practice to the funds’ boards of trustees, or to the variable annuity and variable life insurance contract holders who were the beneficial owners of the Funds’ shares, rendering certain disclosures respondents made concerning the securities lending program materially misleading.”

As a result, the Prudential affiliates “breached their fiduciary duties and failed to satisfy their disclosure obligations to the funds, and investors and prospective investors in the funds,” the complaint states.

The SEC’s order acknowledges that AST and PI self-reported the conduct to the SEC after initially failing to disclose it during an examination, cooperated with the staff’s investigation, and made the voluntary reimbursements.

The order also censures AST and PI, and requires them to cease and desist from committing any further violations. AST and PI did not admit nor deny the SEC’s findings.

Prudential said in a statement that it “has a long track record of being transparent and maintaining constructive relationships with regulators. Consistent with this approach, we proactively self-reported this matter and worked with the SEC to bring it to a resolution. We are pleased to have this matter resolved.”

— Check out Prudential Spends $2.35 Billion to Make Financial Wellness Boost Growth on ThinkAdvisor.


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