SEC Charges Investment Firms for Exceeding Client Limits #

The Securities and Exchange Commission (SEC) has charged two investment firms for exceeding clients’ predesignated investment limits over a two-year period. The companies have agreed to settle separately, paying a combined $9.3 million to resolve the claims.

Charges and Findings #

The SEC found that one firm exposed investors to greater financial risks by allowing accounts to exceed exposure levels that investors had designated when signing up for the enhancement strategy. Dozens of accounts reportedly passed the limit by 50% or more.

The other firm was charged with connecting clients to the first company while aware that investors’ accounts were exceeding the set exposure levels. This firm also received a portion of trading commissions and management and incentive fees.

Financial Impact and Risks #

Both companies received larger management fees while investors were exposed to greater financial risks. The SEC noted that both firms neglected to adopt policies and procedures that could have alerted investors when their exposure exceeded designated limits.

Complex Options Trading Strategy #

The case involves a complex options trading strategy that traded options in a volatility index aimed at incremental returns. This strategy, known as the Collateral Yield Enhancement Strategy, was the primary focus of one of the charged firms.

SEC’s Statement #

An SEC official stated that the two investment advisers allegedly sold a complex options trading strategy to their clients but failed to abide by basic client instructions or implement appropriate policies and procedures. The action holds the firms accountable for failing to execute these basic duties to their clients, even as their clients’ financial exposure grew well beyond predetermined limits.

The SEC’s enforcement highlights the importance of investment firms adhering to client-designated limits and maintaining proper oversight to protect investors from undue financial risks.