Prudential customers lose $72 million from “misleading securities lending programmes”
18 September 2019 Washington D.C.
Image: Shutterstock
Prudential Financial has settled charges with the US Securities and Exchange Commission (SEC) against two of its subsidiaries that they mislead funds they advised and caused them to lose an estimated $72 million in securities lending revenue.
The SEC this week charged AST Investment Services and PGIM Investments with failing to disclose conflicts of interest and making misleading disclosures to the boards for 94 funds they advised.
The commission’s order found that the Prudential subsidiaries facilitated the reorganisation of the funds so that their parent company could receive certain tax benefits. However, in doing so the funds were also subject to significant damage to their earning potential, of which their boards were not made aware.
From approximately July 2005 to November 2015, AST and PGIM directed the funds’ securities lending agent to recall securities on loan from the funds in advance of the securities’ dividend record dates.
According to the SEC, the sole purpose of the recall directive was to increase the tax benefit to Prudential Financial and its insurance affiliates from dividends received on securities held by the funds, i.e. the dividend received deduction.
However, the recall meant the funds did not receive securities lending revenue they would have earned by leaving them on-loan.
The SEC outlined that during this period Prudential received more than $229 million in tax benefits due to this recall practice while the funds did not receive an estimated $72 million in securities lending revenue and additional investment income they would have made on that revenue.
It was also found that the respondents failed to disclose the conflict of interest between Prudential and the funds resulting from the recall practice.
Additionally, the SEC claims the funds' reorganisation subjected them to less favourable tax treatment in certain foreign jurisdictions, but Prudential did not reimburse the funds for resulting losses in a timely manner, despite both subsidiaries assurances they would do so.
The SEC's order acknowledges that AST and PGIM 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 more than $155 million.
The order also censures both subsidiaries 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 PGIM did not admit or deny the SEC's findings.
"Investment advisers must be vigilant in monitoring for conflicts related to actions taken by affiliates, and must act consistently with their representations to their clients," said Dabney O’Riordan, co-chief of the SEC enforcement division's asset management unit.
"Here, AST and PGIM acted to benefit their parent company despite the costs those acts imposed on their clients."
The SEC this week charged AST Investment Services and PGIM Investments with failing to disclose conflicts of interest and making misleading disclosures to the boards for 94 funds they advised.
The commission’s order found that the Prudential subsidiaries facilitated the reorganisation of the funds so that their parent company could receive certain tax benefits. However, in doing so the funds were also subject to significant damage to their earning potential, of which their boards were not made aware.
From approximately July 2005 to November 2015, AST and PGIM directed the funds’ securities lending agent to recall securities on loan from the funds in advance of the securities’ dividend record dates.
According to the SEC, the sole purpose of the recall directive was to increase the tax benefit to Prudential Financial and its insurance affiliates from dividends received on securities held by the funds, i.e. the dividend received deduction.
However, the recall meant the funds did not receive securities lending revenue they would have earned by leaving them on-loan.
The SEC outlined that during this period Prudential received more than $229 million in tax benefits due to this recall practice while the funds did not receive an estimated $72 million in securities lending revenue and additional investment income they would have made on that revenue.
It was also found that the respondents failed to disclose the conflict of interest between Prudential and the funds resulting from the recall practice.
Additionally, the SEC claims the funds' reorganisation subjected them to less favourable tax treatment in certain foreign jurisdictions, but Prudential did not reimburse the funds for resulting losses in a timely manner, despite both subsidiaries assurances they would do so.
The SEC's order acknowledges that AST and PGIM 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 more than $155 million.
The order also censures both subsidiaries 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 PGIM did not admit or deny the SEC's findings.
"Investment advisers must be vigilant in monitoring for conflicts related to actions taken by affiliates, and must act consistently with their representations to their clients," said Dabney O’Riordan, co-chief of the SEC enforcement division's asset management unit.
"Here, AST and PGIM acted to benefit their parent company despite the costs those acts imposed on their clients."
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