He That Goes a Borrowing Goes a Sorrowing. ~Benjamin Franklin

iStock_000016171603Illustra_HiResThe Securities and Exchange Commission (“SEC”) announced on August 10, 2015 that Guggenheim Partners Investment Management LLC (“GPIM”) settled charges that it breached its fiduciary duty by failing to disclose a $50 million loan one of its senior executives (“Executive”) received from an advisory client (“Client A”) in order for him to participate personally in an acquisition led by Guggenheim Partners, LLC (GPIM’s corporate parent). Press release

The Executive’s loan was evidenced by a promissory note secured by assets of the Executive, including his residence and a personal guaranty. The loan had a two-year term, and the Executive was, at all times, current on the payments under the note. About a year later, the Executive refinanced the loan with a different lender, and as a result, Client A was paid in full.
At the time of the loan, GPIM’s code of ethics and insider trading policy included the principle that employees owe a fiduciary duty to clients. The firm’s compliance manual explained that, as a fiduciary, the firm was required to “make full and fair disclosure of all material facts, including potential conflicts of interest” to its clients. GPIM’s code also referred to the guidance in a code of conduct for one of its affiliates, which prohibited employees from accepting loans from clients.

The loan created a potential conflict of interest for the firm in that GPIM might place Client A’s interests over those of GPIM’s other clients. The SEC determined that GPIM did not act reasonably in connection with the Executive’s loan from Client A because it failed to adopt measures to provide meaningful oversight of the Executive’s non-advisory business dealings. For example, it lacked policies and procedures to make its compliance staff aware of the circumstances surrounding the loan. Multiple senior individuals with Guggenheim Partners and GPIM knew about the loan, yet no one communicated the existence of the loan to GPIM’s compliance staff.

GPIM failed to disclose the Executive’s loan when it then invested other clients in two transactions in which Client A invested on different terms. GPIM also violated the Advisers Act when it inadvertently billed a client for asset management fees on non-managed assets through the inaccurate coding of the non-managed assets on its books and records. This led to the inclusion of non-managed assets with managed assets in the calculation of asset management fees for that client. In addition, despite the firm’s gift and entertainment policy against receiving inappropriate gifts or gifts greater than a de minimis value ($250) and the requirement for approval by the chief compliance officer of any exceptions, at least 7 GPIM employees took at least 44 unreported flights on the private planes of GPIM clients. Finally, GPIM failed to implement certain of its compliance policies and procedures, enforce its code of ethics, and maintain certain books and records.

GPIM agreed to pay a $20 million penalty, to be censured, and to engage an independent compliance consultant. It also agreed to cease and desist from committing or causing any further violations of certain provisions of the Investment Advisers Act of 1940 and related SEC rules that the SEC found it had willfully violated. SEC Order

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