A New York City-based mutual fund shop just landed in hot water over $247 million in collateral.
Today the Securities and Exchange Commission (SEC
a settlement with Water Island Capital
]. Water Island -- which runs the $2.2-billion, three-star, and bronze-rated Arbitrage Fund
, and two other mutual funds -- consented to the cease-and-desist order
"without admitting or denying the findings." Water Island agreed to a $50,000 penalty.
could not immediately reach Water Island president and chief investment officer John Orrico
or Water Island's defense counsel, Steven Glaser
of Skadden, Arps, Slate, Meagher & Flom
, for comment on the SEC's claims and the penalty.
"Water Island Capital failed to implement required policies and procedures to ensure all cash collateral was held in the custody of the funds' bank," states Andrew Calamari
, director of the SEC's New York regional office.
Here's where the SEC claims that Water Island fell short:
The SEC's order finds that Water Island Capital did not ensure that roughly $247 million in cash collateral held by broker-dealer counterparties was maintained with the funds' custodial bank. The cash collateral related to the funds' investments in certain total return and portfolio return swaps ...
The SEC's order finds that in addition to causing violations of the custody requirement of Section 17(f)(5) of the Investment Company Act, Water Island Capital caused violations of Section 12 and Rule 12b-1(h) due to its failure to implement the funds' directed brokerage policies and procedures, which required the firm to create and maintain an approved list of executing brokers for the funds as well as to monitor with documentation the funds' compliance with the directed brokerage requirements. Water Island failed to create the list and failed to maintain documentation reflecting monitoring of the funds' compliance pursuant to the funds' policies and procedures. The SEC's order further finds that Water Island Capital caused the funds' vioations of Rule 38a-1 under the Investment Company Act.
The case, investigated by the SEC's Celeste Chase
and Osman Nawaz
in New York and supervised by Amelia Cottrell
, stemmed from an examination by the SEC's Joy Best
, Dawn Blankenship
, Melissa Dahle
, William Maldonado
, and Edward Moy
, also in New York.
Reuters also reported
on the settlement.
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