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SEC Charges PM and Advisory Firm with Misrepresenting Risk in Mutual Fund

The SEC recently charged Catalyst Capital Advisors and its CEO for misleading investors about the management of risk in a mutual fund. The adviser and the CEO agreed to pay a combined $10.5 million to settle the charges.  The SEC also filed a complaint in federal district court in Madison, Wisconsin, against a senior portfolio manager for fraudulently misrepresenting how he would manage risk for the fund. The SEC’s settled order found that, although Catalyst told investors that it abided by a strict set of risk parameters for the Catalyst Hedged Futures Strategy Fund, it breached those parameters and failed to take the required corrective action during a majority of the trading days between December 2016 and February 2017. As alleged, the fund lost approximately 20% of its value during the period as markets moved against it.  The SEC’s complaint against the portfolio manager alleges that he told investors that the fund employed a risk management strategy involving safeguards to prevent losses of more than 8%, when in fact no such safeguards limited losses and the portfolio manager did not otherwise consistently manage the fund to an 8% loss threshold.

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