Federated agreed to pay a $1.5 million penalty to settle charges stemming from the lack of policies and procedures governing the work of a third party consultant who provided analysis, including buy and sell recommendations, regarding pharmaceutical and biotech stocks for certain Federated Funds. According to the SEC’s order, the consultant provided services from 2005 – 2010, in a role that was characterized as “similar to a part-time employee.” During that period, the order states that the consultant was not subject to Federated’s code of ethics. The SEC found that the consultant should have been classified as an “access person” under the code due to the consultant’s knowledge of confidential information about the funds. In reviewing the consultant’s trades, the SEC found that the consultant often made trades in the same companies as the funds “sometimes in close proximity to trades by the funds.” In addition to the consultant’s access to information about the funds, the consultant served on the boards of four companies that were held and traded by the funds. Because the consultant possessed “material non-public information about those companies,” the order finds that the compliance department should have conducted a review regarding whether the securities of those companies should have been included on a restricted list.
According to the order, senior management and the compliance department were unaware of the consultant’s board service until 2010, at which time the relationship was terminated. In addition to terminating the consultant, Federated also undertook additional remedial efforts including conducting an independent review of the use of the consultant, including the funds’ trading in the securities on whose boards the consultant served and adopting policies and procedures that allowed Federated to determine whether consultants had access to or were in possession of material non-public information.