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Prudential Subsidiaries Charged in Securities Lending Action

The SEC charged two subsidiaries of Prudential Financial Inc. with failing to disclose conflicts of interest and making misleading disclosures to fund boards. According to the SEC’s order, Prudential subsidiaries AST Investment Services Inc. and PGIM Investments LLC served as advisers to 94 insurance-dedicated funds. The order finds that in 2006, the funds were reorganized so that Prudential could receive certain tax benefits. Prudential affiliates informed the funds’ boards that the reorganization would provide a more efficient tax structure, benefitting the Prudential enterprise through an increase in the receipt of dividends eligible for a dividend received deduction tax benefit and that the reorganization would not increase fees or otherwise negatively impact the funds’ shareholders. But the boards were not told that the affiliates would recall securities on loan, which would result in a reduction of lending revenue to the funds; and AST and PI cost the funds tens of millions of dollars in interest income when they temporarily recalled securities out on loan, according to the SEC. AST and PI did not disclose, to the funds’ boards or the beneficial owners of the funds’ shares, the conflict of interest between Prudential and the funds in connection with the recalls. The SEC’s order noted that from July 2005 to November 2015, materials furnished to the boards did not disclose either the securities recall practice or the conflict of interest. Second, the funds’ reorganization subjected them to less favorable tax treatment in certain foreign jurisdictions, but Prudential did not timely reimburse the funds for resulting losses despite AST and PI’s assurances to the fund boards it would do so.  The SEC’s order acknowledges that AST and PI self-reported the conduct to the SEC after initially failing to disclose it during an examination, cooperated with the staff’s investigation, and voluntarily reimbursed the funds over $155 million. The order also censures AST and PI, and requires them to disgorge an additional $27.6 million, pay a civil monetary penalty of $5 million, and cease and desist from committing any further violations.  AST and PI did not admit or deny the SEC’s findings.

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