SEC Sues Portfolio Manager Over Committee Minutes
If you tell investors that your firm has a certain type of committee, you better make sure that that committee actually exists and holds meetings. If SEC examiners ask for a copy of committee meeting minutes, and you discover they donít exist, you better not whip up a batch of minutes on the spot. And if youíre asked by someone in your firm for notes of past conversations, youíd better find out why they are asking and for what purpose they are being used, before helpfully drawing them up.
Those are a few of the lessons to be gleaned from a recent SEC enforcement case brought against former Pax World portfolio manager Diane Keefe. In a January 13 order, the SEC alleged that Keefe fabricated minutes of investment committee meetings that never occurred.
Hereís the story, according to SEC: In August of 2003, the SEC conducted a routine examination of the Pax World fund group. SEC examiners apparently requested copies of the notes of the Pax World High Yield Fundís investment committee meeting (the fundís prospectus and proxy statements stated that the fund had such a committee). The fund groupís compliance liaison, who was managing the exam, asked Keefe for the notes. But, according to the SEC, Keefe and the other two purported members of the investment committee had never met.
To respond to the compliance officerís request, Keefe allegedly created a false set of notes. "These investment committee notes, which reflected investment advice, were false in that they consisted of notes of three-way conversations that never occurred," alleged the SEC. Interestingly, the SEC claimed that the date of the first alleged meeting was two months before Keefe joined the firm.
Q: How does the SEC sue someone under the Investment Company Act for allegedly providing a fund with false records, which are later handed to examiners?
A: Under ICA Section 34(b), which prohibits anyone from making an untrue statement of material fact in any document that is required to be kept by ICA Section 31(a). The SEC rule under Section 31(a) requires registered funds to keep files of all advisory material received from the fundís investment adviser. "Keefe was a person from whom the Fund accepted investment advice and the investment committee notes constitute advisory material for purposes of [the rule]," claimed the SEC.
Keefe declined to settle the matter and is contesting the SECís allegations. "We fully expect the proceeding to be dismissed," said Keefeís defense counsel, Robert Knuts of Allen & Overy. "The handwritten notes that are the sole basis for the SECís administrative proceeding were not used in the operation of any fund, did not constitute investment advice to any fund, served no purpose whatsoever, and were never relied upon by anyone for any reason." According to Knuts, "Keefe self-reported the problem with the notes to her employer" before the SEC began its investigation. Keefe, he noted, has an "unblemished record" as an investment professional. "An SEC administrative proceeding against someone like Keefe, when the matter involves zero harm to investors, is an unfortunate use of resources by the SECís enforcement division," he said.