Two subsidiaries of Prudential Financial Inc. will pay $32.7 million in penalties after failing to disclose conflicts of interest and making misleading disclosures to the boards for 94 funds they advised, the SEC said.
Prudential subsidiaries AST Investment Services Inc. and PGIM Investments LLC (PI) served as investment advisors to 94 insurance-dedicated mutual funds, according to the SEC's order.
The SEC's order said AST and PI 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 over $155 million.
The order censures AST and PI and requires them to pay disgorgement of $27.6 million, pay a civil monetary penalty of $5 million, and cease and desist from committing any further violations, the SEC said.
The complaint said from about July 2005 to November 2015, Prudential directed the funds’ securities lending agent to recall securities on loan from the funds in advance of the securities’ dividend record dates. This was done to increase the tax benefit to the funds’ parent, Prudential Financial Inc., and Prudential insurance affiliates from dividends received on securities held by the funds, the complaint said. However, the recall practice resulted in the funds not receiving securities lending revenue they would have earned had the securities not been recalled, the complaint said.
As a result, AST and PI cost the funds tens of millions of dollars in interest income when they temporarily recalled securities the funds had out on loan, the SEC said. AST and PI did not disclose to the funds' boards of trustees or the beneficial owners of the funds' shares the conflict of interest between Prudential and the funds in connection with the recalls, the SEC said.
Also, from January 2006 to March 2018, the funds' reorganization subjected them to less favorable tax treatment in certain foreign jurisdictions, but Prudential did not timely reimburse the funds for resulting losses despite AST and PI's assurances it would do so, the SEC said.
Dabney O’Riordan, co-chief of the SEC Enforcement Division's Asset Management Unit, in a prepared statement said, “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.”
He added, “Here, AST and PI acted to benefit their parent company despite the costs those acts imposed on their clients.”
The SEC said AST and PI did not admit to or deny the agency's findings