Investment Adviser Settles Charges for Disadvantaging ETFs and Their Investors

An investment adviser settled SEC charges for causing its ETFs to engage in prohibited affiliate transactions, exceed permissible leverage thresholds, and fail to disclose that distributions were returns of capital.

The SEC found that between February and June 2023, the firm caused an entity holding a 25 percent stake in the adviser to engage in two prohibited in-kind transactions with one of its ETFs, letting the affiliate swap equity securities for ETF shares for tax benefits, while the adviser wrongly told the fund's board the entity was not an affiliate. This violated Investment Company Act Section 17(a)(1).

The SEC also found that in April and May 2024, the firm caused another ETF to exceed leverage limits through concentrated derivative positions in a single issuer, did not notify the board of the breaches for months, and did not file required disclosures within one business day, violating Section 18(f)(1) and Rule 30b1-10.

Additionally, between July 2021 and June 2024, the firm caused seven ETFs to distribute dividends sourced in part or entirely from returns of capital without required contemporaneous written notices. One fund failed to disclose that up to 88.78 percent of its distributions over multiple years were returns of capital, and the funds lacked compliance policies covering such notices and custom-basket procedures. This violated Section 19(a), Rule 19a-1, and Rule 38a-1.

The firm agreed to a cease-and-desist order and a $400,000 penalty.