Saturday, December 29, 2012

SEC Charges Advisory Firms and Portfolio Managers for Roles in Collapse of Midwest-Based Closed-End Mutual Fund

United States Securities and Exchange Commission

The SEC charged two investment advisory firms and two portfolio managers responsible for managing a Midwest-based closed-end mutual fund for their roles in the failure to adequately inform investors about the fund’s risky derivative strategies that contributed to its collapse during the financial crisis.

An SEC investigation found that the Fiduciary/Claymore Dynamic Equity Fund (HCE) attempted two strategies to enhance returns — writing out-of-the money put options and shorting variance swaps. This exposed HCE to additional undisclosed risks and caused the fund to lose more than $45 million in September and October 2008, which was approximately 45 percent of its net assets. The fund liquidated in 2009.

Fund adviser and administrator Claymore Advisors LLC, which is located in Lisle, Ill., and the sub-adviser responsible for managing HCE’s portfolio, St. Louis-based Fiduciary Asset Management LLC (FAMCO), agreed to settle the SEC’s charges. Claymore has established a plan to distribute up to $45 million to fully compensate investors for losses related to the problematic trading. FAMCO agreed to pay an additional $2 million in disgorgement and penalties. The SEC’s case continues against former FAMCO co-portfolio managers who allegedly made misleading statements in HCE’s periodic reports about the two strategies’ contribution to HCE’s performance and about HCE’s exposure to downside risk.

“When discussing fund performance and risks, fund advisers must candidly and accurately portray how the fund is being managed. The disclosures in this case fell short of the mark,” said Robert J. Burson, Senior Associate Regional Director of the SEC’s Chicago office.

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