New-Jersey ETF Managers fined for breaches relating to award of securities lending mandate
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New-Jersey ETF Managers fined for breaches relating to award of securities lending mandate 02 August 2023US Reporter: Bob Currie
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The US Securities and Exchange Commission has fined a New Jersey-based exchange-traded fund manager for breaches relating to the award of a securities lending mandate on its portfolio, and for taking actions that were detrimental to the best interests of the fund and its investors.
The US regulator ruled that, in 2019, ETF Managers Group took the decision to retain their securities lending business with a broker-dealer — which is unnamed by the SEC but understood to be Wedbush Securities, a registered broker-dealer and investment adviser headquartered in Los Angeles.
It found that ETF Managers’ founder Samuel Masucci and his team had agreed to keep the firm’s lucrative securities lending business with the broker-dealer in exchange for US$20 million in financing and other services, funds that ETF Managers reportedly required as rescue financing to avoid a possible bankruptcy.
A number of large agent lenders had bid for this securities lending mandate in competition with Wedbush, the incumbent securities lending provider, and the SEC ruled that these competing bids offered better terms that could have benefited investors.
One industry source told Securities Finance Times: “A number of large firms were bidding [on the securities lending business] for a number of lucrative ETFs, but [ETF Managers’] decided to leave the business with its current provider, a small broker-dealer which is not a true agent lender.”
“This [decision] never smelt right and it turns out we were right all along. There was some sort of side deal going on with them.”
In taking this action, Masucci then failed to disclose this joint arrangement with the broker-dealer — whereby Wedbush would retain the securities lending mandate, despite stronger competing offers, in exchange for providing the US$20 million in rescue financing and other services — to the fund’s trustees. Instead, Masucci told the trustees that he had no alternative viable options.
Masucci agreed to pay US$4.4 million in combined penalties to settle the charges.
In doing so, he refused to admit or deny the SEC’s conclusions, consenting to a cease-and-desist order, paying a U$400,000 penalty and being subject to restrictions on its right to trade under the Advisers Act and the Investment Company Act.
ETF Managers was also subject to a civil penalty of US$4 million.
In February 2018, Wedbush Securities previously received a US$1.5 million penalty from the Financial Industry Regulatory Authority (FINRA) relating to its failure to comply with Customer Protection Rules under Section 15(c)(3) of the Securities Exchange Act of 1934 and Rule 15c3-3, along with associated failures in its oversight procedures and books and records.
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