Washington, D.C., Oct. 8, 2004 LAWFUEL – Law, attorney, SEC, legal news– The Securities and Exchange Commission today announced simultaneously settled enforcement actions against Invesco Funds Group, Inc. (IFG), AIM Advisors, Inc. (AIM Advisors), and AIM Distributors, Inc. (ADI). The Commission issued an order finding that IFG, AIM Advisors, and ADI violated the federal securities laws by facilitating widespread market timing trading in mutual funds with which each entity was affiliated.
The settlements require IFG to pay $215 million in disgorgement and $110 million in civil penalties, and require AIM Advisors and ADI to pay, jointly and severally, $20 million in disgorgement and an aggregate $30 million in civil penalties.
IFG, a registered investment adviser to the Invesco funds; AIM Advisors, a registered investment adviser to AIM Funds; and ADI, a registered broker-dealer to AIM Funds, are wholly-owned subsidiaries of AMVESCAP LLP, a United Kingdom holding company.
By a separate order, the Commission also announced a settled enforcement action against Raymond R. Cunningham, the former president and chief executive officer of IFG and a former member of the Invesco funds’ board of directors, for his role in IFG’s market timing program. That settlement requires Cunningham to pay $1 in disgorgement and $500,000 in civil penalties.
Randall J. Fons, Regional Director of the SEC’s Central Regional Office, said “The settlements against IFG and Cunningham reflect the Commission’s ongoing pursuit of those investment advisers and their employees who chose to compromise their duty of absolute good faith to shareholders in exchange for profits resulting from undisclosed market timing arrangements. Such entities and individuals will be thoroughly investigated and punished accordingly.”
Harold F. Degenhardt, Administrator of the Commission’s Fort Worth Office, added “AIM Advisors, and its affiliate, ADI, fostered market timing with the knowledge that, in doing so, they could have been advancing only their own interests – most obviously, their interest in additional fees – and not the interests of AIM Funds and its shareholders. In so doing, AIM Advisors became ensnared in a conflict of interest that it failed to disclose, despite its duty to do so. This conduct is unacceptable.”
Among other things, the Commission’s orders concerning IFG and Cunningham set forth the following factual findings:
· From at least 2001 through July 2003, IFG entered into undisclosed market timing agreements with over 40 individuals and entities, which allowed them to market time certain Invesco funds. Some of the timing agreements were entered into with the understanding that the market timer would maintain long-term investments, so-called “sticky assets,” in certain non-timed Invesco funds. At their height, the market timers held over $1 billion of the assets invested in the Invesco funds and made excessive exchanges and redemptions totaling approximately $58 billion. In the aggregate, the market timing trades made under the agreements were detrimental to the Invesco funds’ shareholders.
· IFG financially benefited from these agreements in that it realized additional advisory fees from the assets under management resulting from the timing agreements. Because IFG had reason to believe that the market timing assets, while serving to increase IFG’s advisory fees, could be traded in a manner detrimental to the Invesco funds, IFG had a conflict of interest with the Invesco funds. However, IFG failed to disclose the conflict of interest to the board of directors and shareholders of the affected Invesco funds, thereby breaching IFG’s duty to the Invesco funds.
· During this same time period, the Invesco funds’ prospectuses represented that shareholders could make up to four exchanges out of each fund per twelve-month period. The funds reserved the right to modify the exchange policy if such a modification was determined to be in the “best interests” of the fund. Since IFG’s market timing agreements provided for more than the disclosed number of exchanges, and since IFG did not make a “best interests” determination before entering into the timing agreements, the agreements contravened the prospectus disclosures.
· As IFG’s president and chief executive officer during this time period, Cunningham was responsible for and approved IFG’s undisclosed market timing program. Cunningham was aware of the harmful effects the market timers’ trading potentially had on other fund shareholders from his involvement in resolving issues that arose from these activities and from his receipt of information from IFG’s chief compliance officer. Furthermore, although he was responsible for informing the funds’ board of directors about IFG’s operations, Cunningham never disclosed the existence of the market timing agreements to the board.
Additionally, the Commission’s order concerning AIM Advisors and ADI sets forth the following findings:
· Between January 2001 and September 2003 (the relevant period), AIM Advisors entered into 10 negotiated, but undisclosed, market timing agreements with individuals and entities, allowing the timers to exceed AIM Funds’ per-year 10-exchange limit, and to make trades, valued collectively at tens of millions of dollars, within AIM Funds. One of the timing agreements was entered into with the understanding that the market timer would make a long-term investment, or invest so-called “sticky assets,” in certain AIM Funds.
· The market timing agreements financially benefited AIM Advisors in that AIM Advisors realized additional advisory fees from the timed assets. The fact that AIM Advisors had reason to believe that the assets brought to AIM Funds under the market timing agreements, while effectively increasing AIM Advisors’ advisory fees, could be traded in a manner detrimental to AIM Funds, gave rise to a conflict of interest between AIM Advisors and AIM Funds. AIM Advisors failed to disclose the conflict of interest to the board of trustees or shareholders of AIM Funds, thereby breaching its fiduciary duty to AIM Funds and the AIM Funds shareholders.
· During the relevant period, AIM Funds’ Commission-filed prospectuses contained a disclosure that shareholders were limited to 10 exchanges per calendar year. The disclosure expressly linked the rationale for the 10-exchange limit to the potential harm to the performance of AIM Funds posed by excessive short-term trading and market timing generally. Consequently, it is implied in the disclosure that AIM Advisors would not allow trading it had identified as market timing, unless AIM Advisors had concluded, after sufficient analysis, that the proposed market timing would not harm the performance of AIM Funds. In fact, AIM Advisors failed to conduct analysis sufficient to determine whether the proposed market timing agreements would harm, or whether the actual agreements were harming, the performance of AIM Funds.
· ADI negotiated and approved market timing agreements, provided materially misleading information about AIM Advisors’ market timing monitoring and prevention efforts to the board of trustees of AIM Funds, and financially benefited from the timing agreements.
As a result of the conduct described above, the orders find that IFG and AIM Advisors willfully violated, and ADI aided and abetted AIM Advisors’ violations of, Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act), and IFG, AIM Advisors and ADI willfully violated Section 17(d) of the Investment Company Act of 1940 (Investment Company Act) and Rule 17d-1 thereunder. The order also finds that IFG and AIM Advisors willfully violated Section 34(b) of the Investment Company Act. In the orders, IFG, AIM Advisors and ADI are censured. In addition, Cunningham’s order finds that he aided and abetted IFG’s violations of the Advisers Act and that he violated Section 34(b) of the Investment Company Act. The order requires him to cease and desist from violating or causing future violations of these provisions. The order also prohibits him from associating with an investment adviser, broker, dealer, or investment company for a period of two years, and further prohibits him from serving as an officer or director of an investment adviser, broker, dealer, or investment company for five years. Pursuant to their respective offers of settlement, IFG, AIM Advisors, ADI, and Cunningham consented to entry of the Commission’s orders without admitting or denying the findings.
The enforcement action against IFG has been coordinated with the Office of the New York Attorney General, the Office of the Colorado Attorney General and the Colorado Division of Securities. The enforcement actions against AIM Advisors, ADI, and Cunningham have also been coordinated with the Office of the New York Attorney General.