On July 27, 2026, the SEC announced the settlement of administrative proceedings brought against a registered investment adviser for allegedly causing exchange-traded funds it advised to commit multiple violations of the Investment Company Act of 1940 between July 2021 and November 2024, including leverage-limit breaches under Rule 18f-4 (the derivatives rule), prohibited affiliate transactions and return-of-capital disclosure failures.
Affiliate Transactions. According to the order, Trust A, which held an ownership interest in the adviser, was an affiliated person of the adviser and a second-tier affiliate of the applicable ETF, for which the adviser served as investment adviser. In two in-kind transactions in February and June 2023, Trust A transferred equity securities to the ETF in exchange for the ETF’s shares, obtaining certain tax benefits, without any application to the SEC for exemptive relief. The SEC alleged that because the adviser recommended and facilitated these transactions—and represented to the fund’s board that they were not affiliate transactions—the adviser caused Trust A to violate Section 17(a)(1) of the Investment Company Act, which prohibits an affiliated person of a fund (or an affiliate of such a person), acting as principal, from knowingly selling securities to the fund absent an exemption.
Derivatives Rule. In its first enforcement action alleging a violation of the derivatives rule, the SEC alleged that the adviser caused an ETF to exceed the leverage limits prescribed under the derivatives rule. During two episodes in April and May 2024, the ETF’s relative value at risk exceeded the Rule’s 200% threshold—rising as high as 291%—as a result of a concentrated derivatives position in a single issuer. The SEC alleged that because each breach lasted five or more business days, the adviser was required to—but did not timely— notify the ETF’s board and file current reports on Form N-RN. The SEC found that this conduct caused the ETF to violate Section 18(f)(1), which prohibits open-end funds from issuing senior securities, other than bank borrowings, and Rule 30b1-10, which requires a fund to report liquidity and derivatives risk events on Form N-RN.
Return-of-Capital Disclosure Failures. The SEC also alleged that between July 2021 and June 2024, the adviser caused seven ETFs it advised to distribute dividends that included return of capital without providing shareholders the written notices required by Section 19(a) and Rule 19a-1, which require a fund to provide contemporaneous notice to investors when distribution includes a return of capital. The order alleged that the failures spanned multiple years and multiple funds, with return of capital constituting as much as 98.80% of a fund’s distributions in a given period.
The order also alleged that between July 2021 and June 2026, the adviser’s ETFs failed to adopt and implement adequate compliance policies and procedures, causing violations of Rule 38a-1, which requires funds to adopt and implement policies and procedures reasonably designed to prevent violations of the federal securities laws.
Without admitting or denying the allegations, the adviser agreed to cease and desist from future violations and to pay a civil monetary penalty of $400,000. The order acknowledged the remedial acts undertaken by the adviser and its cooperation with the SEC staff.
