A non-depository state-chartered trust company settled SEC charges for operating unregistered investment companies and offering and selling unregistered securities.
According to the SEC's Order, the trust company sold investment interests in regular and retirement funds since 1984, but did not register the trust funds as investment companies or register the securities of the trust funds with the SEC. The SEC stated that while there is an exemption from the registration requirements for trust funds offered by banks under the Investment Company Act and the Securities Act in certain situations, the trust company had not qualified for such an exemption since at least 2015. The SEC found that the company did not qualify for the exemption from the definition of "investment company" because it did not have or exercise "substantial investment responsibility" when managing the funds. Further, the SEC found that the company inadequately oversaw the advisory firm it hired to manage the trust funds, and failed to meet other requirements for one category of funds. As a result, the SEC found that the company did not qualify for a registration exemption under the Securities Act, violated Sections 5(a) and 5(c) of the Securities Act and caused the trust funds to violate Section 7(a) of the Investment Company Act.
To settle the charges, the company agreed to (i) cease and desist from future violations, (ii) pay a $300,000 civil money penalty, and (iii) comply with the undertakings in the order, including distributing any funds remaining in its trust funds to investors. The process of terminating and liquidating the trust funds is expected to be completed by October 30, 2020.
In a public statement, SEC Commissioner Hester M. Peirce dissented from the SEC's decision to pursue an enforcement action against the company as opposed to providing regulatory guidance. Ms. Peirce explained that the SEC had not addressed what it means for a trust fund to be "maintained by" a company, citing the uncertainty left behind by the 1980 interpretation of the statute. Additionally, Ms. Peirce noted the overlap in regulatory authority over the company. She asserted that the SEC should have convened with state and federal bank regulators in order to address concerns of funds falling outside of the regulatory scope of the Investment Company Act and potential alternative regulatory frameworks.
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