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SEC Charges Advisers/PMs for Failing to Disclose Derivative Strategies

On December 19, the SEC announced charges against the investment advisory firms and portfolio managers of a closed-end mutual fund for failing “to adequately inform investors about the fund’s risky derivative strategies that contributed to its collapse during the financial crisis.”  The SEC found that the Fiduciary/Claymore Dynamic Equity Fund attempted two strategies to enhance returns – writing out-of-the-money put options and shorting variance swaps. However, according to the SEC, the risks of these strategies were not adequately disclosed in the fund’s registration statement or annual financial report.  The strategies ultimately caused the fund to lose more than 45% of its net assets in 2008 (the fund subsequently liquidated in 2009).

The advisers have both settled with the SEC, neither admitting nor denying the charges.  Fund adviser and administrator, Claymore Advisors LLC, has set up a distribution plan to fully reimburse shareholders for up to $45.4 million in losses from the derivative transactions.  Fiduciary Asset Management LLC, the subadviser that managed the fund’s portfolio, has agreed to pay $2.1 million in fines.  The case continues against the two fund portfolio managers.