SEC Charges Franklin Advisers with Breach of Fiduciary Duty and Violating Investment Company Limitations
July 2, 2020
File No. 3-19854
July 2, 2020 - The Securities and Exchange Commission today announced settled charges against California-based Franklin Advisers, Inc., a registered investment adviser, for breaching its fiduciary duty to its client funds and failing to follow its own policies and procedures, and settled charges against Franklin Advisers and Toronto-based Franklin Templeton Investments Corp., also a registered investment adviser, for causing client funds to violate investment limitations.
According to the SEC's order, from October 2013 to November 2015, both Franklin Advisers and Franklin Templeton Investments purchased certain exchange-traded funds on behalf of client funds, causing the funds to exceed the limits set forth in Section 12(d)(1)(A) of the Investment Company Act of 1940, which prohibits investing more than 10% of an investment company's assets in other investment companies or acquiring in excess of 3% of the outstanding shares of an investment company. The SEC's order further finds that, in November 2015, Franklin Advisers sold shares of certain ETFs held by its client funds in order for the funds to come into compliance with the limitations, causing certain client funds to suffer more than $2 million in losses. The order finds that Franklin Advisers did not reimburse its client funds for these losses, despite its trade error policy normally providing otherwise. Franklin Advisers then failed to disclose to the client funds' board of directors the losses incurred, Franklin Advisers' decision not to reimburse the losses, the associated conflicts of interest, or the deviation from Franklin Advisers' trade error policy.
The SEC's order finds that Franklin Advisers violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder, and caused its client funds to violate Section 12(d)(1)(A)(iii) of the Investment Company Act and Rule 38a-1(a) thereunder. The order also finds that Franklin Templeton Investments caused its client funds to violate Section 12(d)(1)(A)(i) of the Investment Company Act. Without admitting or denying the SEC's findings, Franklin Advisers consented to a cease-and-desist order, a censure and a civil penalty of $250,000, and Franklin Templeton Investments consented to a cease-and-desist order and a civil penalty of $75,000.
The SEC's investigation was conducted by Gwen Licardo of the Enforcement Division's Asset Management Unit and supervised by Assistant Director Corey Schuster. Katherine Feld, Senior Special Counsel to the Deputy Director, Office of Compliance Inspections and Examinations provided support.