Bank of America to Settle SEC Mutual Fund Charges for $375 Million
The Commission ordered BACAP, BACAP Distributors and BAS to pay $375 million, consisting of $250 million in disgorgement and $125 million in penalties. The money will be distributed to the mutual funds and their shareholders that were harmed as a result of market timing and late trading in Nations Funds and other mutual funds. The Commission also censured BACAP, BACAP Distributors and BAS, ordered them to undertake certain remedial actions to strengthen their oversight of compliance with the federal securities laws, and ordered that they cease and desist from further violations.
Mark K. Schonfeld, Regional Director of the Northeast Regional Office, said, "Today's order details the conduct of Bank of America on three levels - as a mutual fund adviser, as a broker and as a clearing firm. As a fund adviser, BACAP permitted timing in its own funds. As a broker and clearing firm, BAS enabled late trading and market timing in many other mutual funds. This settlement will help ensure compensation for victims and help protect against a recurrence of such misconduct."
The Commission's Order finds that, from as early as July 2000 and continuing through July 2003, BACAP and BACAP Distributors entered into arrangements with two BAS clients and allowed them to engage in frequent short-term trading in at least 13 Nations Funds mutual funds, including international funds. In connection with one of these arrangements, BACAP and BACAP Distributors received "sticky assets" - long-term investments that were to remain in place in return for allowing the client to market time the funds. In addition, in 2002, the Board of Trustees of the Nations Funds approved a redemption fee on short-term trades in certain funds susceptible to timing, but simultaneously approved an exemption for one of these entities from the redemption fee. BACAP and BACAP Distributors did not disclose the existence of these approved timing relationships, or the fact that one of these clients was being exempted from the redemption fee, in prospectuses and proxy statements issued to shareholders and potential shareholders.
The Commission also finds that BAS, a registered broker dealer, facilitated market timing and late trading by some introducing broker dealers and a hedge fund at the expense of shareholders of Nations Funds and other mutual fund families. These entities effected their late trading through BAS's "Special Mutual Fund Order Entry System." Once granted access to this system, these entities could and did enter mutual fund trade orders as late as 7:00 p.m. ET. BAS either knew or recklessly disregarded that these entities were engaged in late trading through this system. BAS also provided its introducing broker dealer clients with account management tools and other assistance that enabled the introducing broker dealers to conceal the market timing activities of their clients from unsuspecting mutual funds, and thus facilitated hundreds of market timing trades after the mutual funds had acted to block these entities from further trading.
As a result, the Commission's Order finds that BACAP willfully violated Sections 206(1) and 206(2) of the Advisers Act, Sections 17(d), 20(a), and 34(b) of the Investment Company Act and Rules 17d-1 and 20a-1 thereunder. It also finds that BACAP Distributors willfully violated Section 17(d) of the Investment Company Act and Rule 17d-1 thereunder, Section 17(a) of the Securities Act, and Sections 10(b) and 15(c) of the Exchange Act and Rules 10b-5 and 15c1-2 thereunder, as well as willfully aided and abetted and caused BACAP's violations of Sections 206(1) and 206(2) of the Advisers Act, and Section 34(b) of the Investment Company Act. The Commission's Order further finds that BAS willfully violated Section 17(a) of the Securities Act, Sections 10(b), 15(c) and 17(a) of the Exchange Act and Rules 10b 5, 15c1-2, 17a-3, and 17a-4 thereunder, and Rule 22c-1 as adopted under Section 22(c) of the Investment Company Act, as well as willfully aided and abetted and caused BACAP's violations of Sections 206(1) and 206(2) of the Advisers Act and Section 34(b) of the Investment Company Act and certain introducing broker dealers' violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b 5 thereunder.
BACAP, BACAP Distributors and BAS consented to the entry of the Commission's Order without admitting or denying the Commission's findings.
In determining to accept the settlement, the Commission considered BACAP's, BACAP Distributor's, and BAS's cooperation in this investigation. The Commission also considered certain efforts voluntarily undertaken by BACAP, BACAP Distributors, BAS and the Nations Funds. Among other things, BAS voluntarily undertook to exit the unaffiliated introducing broker dealer mutual fund clearing business. The Nations Funds and the independent trustees also voluntarily undertook to implement certain election and retirement procedures that will result in the replacement of seven trustees by early 2005. The Governance Committee of the Board of Trustees of Nations Funds (Board), comprised entirely of independent trustees, is responsible for making recommendations to the Board on issues related to the composition and operation of the Board, including nominating replacements for these trustees.
The SEC's action was brought contemporaneously with a related action by the Attorney General of the State of New York, the Office of the Comptroller of the Currency and the Federal Reserve Bank of Richmond.
The Commission's investigation is continuing.