General Electric's settlement
with the SEC over allegations that some of its subsidiaries paid kickbacks to Iragi government officials as part of the United Nation's "oil-for-food" progam has created a wrinkle for its mutual fund arm.
This afternoon GE asked the SEC to waive an Investment Company Act rule that bars investment advisors that have settled wrongdoing with the SEC from advising registered mutual funds [SEC filing
]. Technically, GE is seeking exemptive relief from section 9a of the 1940 Investment Company Act for GE Asset Management (GEAM) and GE Investment Distributors.
GE's petition points out that neither GEAM nor the distribution company were involved with the misconduct that the SEC accused the four separate GE subsidiaries of making (GE acquired two of the subsidiaries after the alleged misconduct occured) [see SEC complaint
None of the officers or employees of GEAM or the distrubution company were involved in making the payments to the Iraqi Health Ministry.
The petition also claims that the funds' shareholders would suffer undue hardship if GE were forced to step aside as the fund advisor.
The rule, argues GE, was intended "to get rid of persons with criminal records, persons who were under injunctions from the courts of competent jurisdiction for improper practices in connection with securities."
Its lawyers add that at the time of the section's adoption "investment companies typically were managed by relatively small partnerships. It could not have been foreseen that investment advisers and other service providers to investment companies would in the future be part of large financial service organizations like the Applicants are. As a result, the drafters of the provision could not have intended that Section 9 would operate as it does in the present case. That is, it was not intended that an investment company would have to be deprived of its management or distribution because of alleged violations that are not even remotely related to the manager's or distributor's activities."
For these reasons, GE officials contend that it would not be against the public interest or the protection of investors to grant their application.
GEAM is the advisor to the GE Funds, GE Investment Funds and GE Instutional Funds. It also serves as a subadvisor to the Transamerica Partners Money Market Portfolio
and PNC International Equity Fund
The SEC has granted GE investment advisory units exemptive relief from the rule twice in the past. The first time was in 1987 after the SEC punished Kidder, Peabody & Co. for parking securities on behalf of Ivan Boesky.
The second time was last year when GE settled a case brought by the SEC over whether GE management had followed proper accounting principles in 2002 and 2003.
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