The Securities and Exchange Commission has taken legal action against an investment adviser for breaching regulations outlined in the Liquidity Rule.
This action against Pinnacle Advisors LLC and individuals associated with a mutual fund it advised, is the first ever enforcement case of its nature, according to a May 5 news release. The Liquidity Rule restricts mutual funds from investing more than 15% of their net assets in illiquid investments.
"The Liquidity Rule provides substantive protections to shareholders of open-end funds," Sheldon L. Pollock, SEC associate regional director in New York, said in the release. "Trustees must exercise oversight on behalf of shareholder interests, and the Commission will hold trustees accountable when they fail to fulfill the most basic requirements under the applicable rules."
The SEC alleges the fund held approximately 21 to 26% of its net assets in illiquid investments from June 2019 to June 2020, according to the release. Pinnacle Advisors and its officers are accused of classifying the fund's largest illiquid investment as "less liquid" and failing to present a plan to reduce the fund's illiquid investments as required.
The SEC's complaint seeks permanent injunctions and civil money penalties, the release reported. The fund in question is currently in the process of liquidation and is not separately charged. One trustee, Joseph Masella, has settled charges and agreed to pay a civil penalty of $20,000.
The SEC has also filed charges against Pinnacle Investments LLC, an affiliate of Pinnacle Advisors, for making false and misleading statements in its Form ADV brochure, the release said. Pinnacle Investments has consented to an order requiring it to cease and desist from violations and pay disgorgement and a civil penalty.
The SEC's investigation and litigation in this case involve various individuals and teams within the SEC, including the Retail Strategy Task Force, the Division of Examinations and the Enforcement Division's Office of Investigative and Market Analytics, the release reported.