The Securities and Exchange Commission has announced that Guggenheim Partners Investment Management has agreed to settle charges it breached its fiduciary duty by failing to disclose a $50m loan that one of its senior executives received from an advisory client.
Santa Monica, California-based Guggenheim, a subsidiary of global financial services firm Guggenheim Partners, will pay $20m to settle charges for the disclosure failure and other violations.
According to the SEC’s order instituting a settled administrative proceeding, a senior Guggenheim executive obtained the loan in July 2010 so he could fund his personal investment in a corporate acquisition led by Guggenheim’s parent company. In August 2010, Guggenheim invested certain of its advisory clients in two transactions in which the client who made the loan also had invested, but on different terms. The Guggenheim executive and the client who made the loan discussed the two transactions and the Guggenheim executive played a role in structuring them.
The order finds that multiple senior officials at Guggenheim and its parent company knew of the loan, but none of them informed the firm’s compliance staff. According to the order, Guggenheim did not disclose the loan or the potential conflict of interest created by the executive’s receipt of it to its other clients involved in the transactions.
'As fiduciaries, investment advisors must be vigilant about disclosing all material facts to their clients, including actual and potential conflicts of interest', said Andrew J. Ceresney, Director of the SEC Division of Enforcement. 'Guggenheim unlawfully failed to disclose the conflict of interest created by the outside business activity of one of its senior executives and the $20m penalty reflects the significance of this and other regulatory failures'.
The SEC’s order also finds that Guggenheim inadvertently categorized certain investments of an institutional advisory client as managed assets when they were not and charged the client approximately $6.5m in asset management fees it did not earn. According to the order, after Guggenheim identified the error, it did not issue a credit to the client until November 2014, nearly two years later.
In addition, the order finds that Guggenheim’s compliance program was not reasonably designed to prevent violations of the federal securities laws. The order further finds that Guggenheim failed to enforce its code of ethics, including with respect to Guggenheim employees taking dozens of unreported trips on clients’ private airplanes.
'Guggenheim’s violations spanned multiple areas of its operations', said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office. 'Guggenheim fell short in preventing these violations in numerous core areas of its investment advisory business'.
Without admitting or denying the findings, Guggenheim agreed to pay a $20m penalty, to be censured, and to engage an independent compliance consultant. It also agreed to cease and desist from committing or causing any further violations of certain provisions of the Investment Advisers Act of 1940 and related SEC rules that the SEC found it had willfully violated.