The Securities and Exchange Commission ("SEC") has charged two subsidiaries of Prudential Financial Inc. with failing to disclose conflicts of interest and making misleading disclosures to the boards for 94 funds they advised.
According to the SEC's order, Prudential subsidiaries AST Investment Services Inc. and PGIM Investments LLC ("PI") served as investment advisers to 94 insurance-dedicated mutual funds. The SEC found that, in 2006, the funds were reorganized so that Prudential could receive certain tax benefits. Those benefits to Prudential, however, came with negative consequences to the funds, the SEC asserted.
First, according to the SEC, 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. 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, the SEC asserted.
Second, the SEC added, 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 that it would do so.
"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 SEC's order acknowledged 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 voluntarily reimbursed the funds over $155 million. The order also censured AST and PI, and required them to disgorge an additional $27.6 million, pay a civil monetary penalty of $5 million, and cease and desist from committing any further violations.
AST and PI did not admit or deny the SEC's findings.
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].