Securities Exchange Act of 1934
Release No. 50507 / October 8, 2004
INVESTMENT ADVISERS ACT OF 1940
Release No. 2312 / October 8, 2004
INVESTMENT COMPANY ACT OF 1940
Release No. 26630 / October 8, 2004
Admin. Proc. File No. 3-11702
In the Matter of RAYMOND R. CUNNINGHAM, Respondent. |
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ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 15(b)(6) OF THE SECURITIES EXCHANGE ACT OF 1934, SECTIONS 203(f) AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940 AND SECTIONS 9(b) AND 9(f) OF THE INVESTMENT COMPANY ACT OF 1940 |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934 ("Exchange Act"), Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") and Sections 9(b) and 9(f) of the Investment Company Act of 1940 ("Investment Company Act") against Raymond R. Cunningham ("Respondent" or "Cunningham").
II.
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934, Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the Investment Company Act of 1940 ("Order"), as set forth below.
III.
On the basis of this Order and Respondent's Offer, the Commission finds1 that:
Overview
1. This is a proceeding against Raymond R. Cunningham, the former chief executive officer ("CEO"), president, and chief operating officer ("COO") of Invesco Funds Group, Inc. ("IFG"), a registered investment adviser to the Invesco mutual fund complex (the "Invesco Funds" or "Funds"), based on his involvement in IFG's market timing program from 2001 through July 2003 (the "relevant time period"). By entering into market timing agreements, IFG breached its fiduciary duties to the Funds. The agreements also contravened the Funds' prospectus disclosures.
2. Market timing includes (a) frequent buying and selling of shares of the same mutual fund or (b) buying or selling mutual fund shares in order to exploit inefficiencies in mutual fund pricing. Market timing, while not illegal per se, can harm other mutual fund shareholders because it can dilute the value of their shares, if the market timer is exploiting pricing inefficiencies, or disrupt the management of the mutual fund's investment portfolio and can cause the targeted mutual fund to incur costs borne by other shareholders to accommodate frequent buying and selling of shares by the market timer.
3. Under the market timing agreements, IFG, through Cunningham and others, permitted certain select investors ("Market Timers") to make excessive exchanges and redemptions totaling approximately $58 billion in select Invesco Funds. IFG required, either expressly or tacitly, the Market Timers' investment of "sticky assets" in Invesco Funds (i.e., long-term money that would remain in a particular fund without being actively traded) under some of the agreements.
4. The market timing agreements financially benefited IFG in that IFG realized additional advisory fees from the timed Funds and sticky assets under its management. Because IFG had reason to believe that the assets brought to the Funds under the market timing agreements, while serving to increase IFG's advisory fees, could be traded in a manner detrimental to the Funds, IFG had a conflict of interest with the Funds. IFG and Cunningham failed to disclose the conflict of interest to the board of directors of the Funds or to the Fund shareholders and obtain the board members' consent to the agreements, thereby breaching IFG's fiduciary duty to the Funds.
5. The market timing agreements were also inconsistent with the disclosures made in the Funds' prospectuses. The prospectuses stated that shareholders could make up to four exchanges out of each Fund per twelve-month period. The market timing agreements provided for more than the disclosed number of exchanges. Furthermore, while the prospectuses also disclosed that each Fund reserved the right to modify the exchange policy if such a modification was determined to be in the best interests of the Fund, IFG failed to make an appropriate determination that each proposed market timing agreement was in the best interest of the Fund before entering into the agreement. In the aggregate, the market timing trades made under the agreements were detrimental to the Funds' shareholders for the reasons set forth in paragraph 2 above.
Respondent
6. Cunningham served as IFG's CEO from January 2003 through July 2004. He served as IFG's president from August 2001 through February 2004, and as its COO from August 2001 through December 2002. From March 1999 through July 2001, Cunningham was IFG's sales national sales manager. Cunningham was a member of the board of directors for the investment companies IFG advised from at least 2001 through October 2003. He also served as the president, CEO, and chairman of Invesco Distributors, Inc., the broker-dealer affiliated with IFG, from March 1999 through 2003. Cunningham, age 53, is a resident of South Carolina. On December 2, 2003, the Commission filed an action against Cunningham and IFG in federal district court in connection with the matters described herein. SEC v. IFG et al., Civil Action No. 03-N-2421 (PAC).
Other Related Entities
7. IFG, a Delaware corporation with headquarters in Denver, Colorado, and its predecessors have been registered with the Commission as an investment adviser since 1957. Since February of 1997, IFG has been a wholly-owned subsidiary of AMVESCAP PLC, a public company headquartered in London, England. During the relevant time period, IFG served as an investment adviser to eight registered open-ended investment companies, consisting of over forty-five series (each of which is functionally a separate investment company).
Facts
Cunningham Was Aware of and Approved IFG's Market Timing Program
8. As IFG's CEO, president, and COO during the relevant time period, Cunningham was responsible for and approved IFG's program whereby IFG entered into agreements with select investors allowing them to market time the Invesco Funds.
9. Soon after he became IFG's president and COO, Cunningham continued to employ an IFG employee to manage what was known as IFG's "market timing desk" on a full-time basis. With Cunningham's knowledge, this employee received proposals from investors seeking to market time the Invesco Funds and administered the process whereby IFG approved their proposals.
10. Cunningham also directly supervised the activities of other IFG employees who were integral to IFG's market timing program. Specifically, Cunningham supervised IFG's chief investment officer ("CIO"), who determined whether to approve the market timing proposals, and IFG's national sales manager, who supervised the market timing desk and negotiated some of the market timing proposals himself.
11. Cunningham knew that with most Market Timers, IFG required that they keep their timed monies within the Invesco fund complex when exchanging out of a Fund approved for timing. Cunningham also knew or was reckless in not knowing that some Market Timers agreed to maintain sticky assets within the Invesco fund complex.
12. On several occasions, issues arose within IFG relating to the harmful trading activities of specific Market Timers. Cunningham met with other IFG employees to resolve these issues, including reducing market timing capacity and confining their trading activities to fewer Funds, while continuing the operation of IFG's market timing program.
13. Cunningham held positions on IFG's Executive Committee, which met on a weekly basis to discuss company-wide issues; on the Risk Management Committee, which considered the impact of potential compliance problems; and on the Portfolio Review Committee, which was instituted for purposes of reviewing each Fund on a quarterly basis to discuss performance-related issues with the relevant portfolio managers and IFG management. However, Cunningham failed to inform any of these management committees about IFG's market timing program.
Cunningham Made Decisions Concerning IFG's Largest Market Timing Agreement
14. Cunningham knew that IFG had a market timing agreement with Canary Capital Partners LLC ("Canary"), the Market Timer to which IFG had granted the largest amount of market timing capacity. In February 2003, IFG's CIO specifically informed Cunningham about the negative effects of Canary's trading activities on other shareholders in the Funds. However, rather than terminating IFG's relationship with Canary, Cunningham approved a plan to reduce Canary's timing capacity and to confine its trading activities to fewer Funds.
15. During 2002, Cunningham also played a role in introducing Canary to Invesco's European offshore fund complex. Cunningham did so with the knowledge and understanding that Canary intended to market time the offshore complex's funds, and that IFG would receive additional fees as a result of this agreement.
Cunningham Ignored Compliance Advice Relating to the Market Timing Program
16. In January 2003, Cunningham received a memorandum relating to market timing activities from the attorney who served as IFG's chief compliance officer. In this memorandum, the chief compliance officer stated that the market timing activity in the Funds was at high levels, and that between $700 million and $1 billion of the assets invested in the Funds were estimated to be held by market timers.
17. In his memorandum, the chief compliance officer discussed how IFG's market timing policy might not be in the best interests of the Funds and their shareholders. The chief compliance officer explained a number of the potentially detrimental effects of market timing, including the portfolio managers' increased need for cash positions, lower returns in the timed Funds, capital gain taxes unfairly paid by long-term shareholders, and negative impacts to the portfolio managers' abilities to carry out their investment strategies.
18. The chief compliance officer's memorandum quoted the prospectus language relating to the permissible number of exchanges. The chief compliance officer recommended that IFG either enforce the existing prospectus language, modify the prospectus language to disclose IFG's actual practices, or adopt a new policy to limit market timing.
19. Cunningham did not circulate the chief compliance officer's memorandum to the board of directors of the Funds, nor did he follow any of the chief compliance officer's recommendations.
Breach of Fiduciary Duty
20. During the relevant time period, Cunningham was the president, COO, and CEO of IFG. As described above, Cunningham was responsible for and approved the market timing program in operation at IFG during this period. In addition, Cunningham was aware of the harmful effects the Market Timers' trading potentially had on other Fund shareholders from his involvement in resolving issues that arose from these activities and from his receipt of the chief compliance officer's memorandum.
21. Cunningham also served as a member of the board of directors for the Funds IFG advised. Cunningham regularly attended the Funds' board meetings and, as one of IFG's senior executives, was responsible for formally informing the Funds' board about IFG's operations. However, Cunningham never disclosed the existence of the market timing agreements to the Funds' board of directors.
22. Cunningham knew, or was reckless in not knowing, that the assets brought to the Funds under the market timing agreements, while serving to increase IFG's advisory fees, could be traded in a manner detrimental to the Funds. This placed IFG in a conflict of interest situation with the Funds that was not disclosed to the Funds' board of directors or shareholders and through which IFG breached its fiduciary duty to the Funds.
The Funds Prospectuses Prohibited Market Timing and Frequent Trading in Invesco's Mutual Funds at the Same Time IFG Allowed Investors to Market Time the Funds
23. During the same period that IFG entered into agreements with Market Timers, the prospectuses for the Funds represented that IFG discouraged frequent trading by investors by attempting to limit the number of exchanges a shareholder could make in each Fund. To that end, these prospectuses disclosed that shareholders could "make up to four exchanges out of each Fund per twelve-month period." The prospectuses further disclosed that "[e]ach Fund reserves the right to reject any exchange request, or to modify or terminate the exchange policy, if it is in the best interests of the Fund."
24. Throughout the relevant time period, IFG provided these prospectuses to shareholders and prospective shareholders in the Funds. IFG also included the prospectuses in registration statements for the Funds filed with the Commission.
25. Cunningham knew, or was reckless in not knowing, that IFG's agreements with Market Timers were inconsistent with the Funds' prospectus disclosure. Specifically, he knew that the Market Timers were being allowed to make more than four exchanges out of certain Funds in a twelve month period and also knew, or was reckless in not knowing, that IFG failed to make an appropriate determination that each proposed market timing agreement was in the best interest of the Fund before entering into the agreement.
26. As of January 2003, Cunningham was also aware from the memorandum he received from the chief compliance officer that IFG should either enforce the existing prospectus language, modify the prospectus language or disclose IFG's actual policies, or adopt a new policy to limit market timing.
27. As a senior executive of IFG, Cunningham received draft prospectuses for his review and comment before they were published. However, Cunningham never modified the exchange policy set forth in the prospectuses before publication.
28. Cunningham also signed the Funds' registration statements, which included the Funds' prospectus disclosures, and therefore is responsible for the misleading statements made therein.
Violations
29. As a result of the above-described conduct, Cunningham:
- willfully aided and abetted and caused IFG's violations of Section 206(1) and (2) of the Advisers Act, and
- willfully violated Section 34(b) of the Investment Company Act.
Undertakings
30. Respondent undertakes to cooperate fully with the Commission in any and all investigations, litigations or other proceedings brought by the Commission relating to or arising from the matters described in the Order, and agrees:
- To comply with any and all reasonable requests by the Commission's staff for documents or other information;
- To be interviewed at such times as the Commission's staff reasonably may direct;
- To appear and testify in such investigations, depositions, hearings or trials as the Commission's staff reasonably may direct; and
- That in connection with any (i) testimony of Respondent to be conducted by testimony session, deposition, hearing or trial, or (ii) requests for documents or other information, that any notice or subpoena for such may be addressed to Respondent's counsel, and be served by mail or facsimile.
IV.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Respondent Cunningham's Offer.
Accordingly, it is hereby ORDERED:
A. Pursuant to Section 203(k) of the Advisers Act and Section 9(f) of the Investment Company Act, that Respondent Cunningham cease and desist from committing or causing any violations and any future violations of Sections 206(1) and 206(2) of the Advisers Act and Section 34(b) of the Investment Company Act.
B. Pursuant to Section 15(b)(6) of the Exchange Act, Section 203(f) of the Advisers Act, and Section 9(b) of the Investment Company Act, that Respondent Cunningham be barred from association with any broker, dealer, or investment adviser, and is prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter, with a right to reapply for association after two (2) years from the date of the Order to the appropriate self-regulatory organization, or if there is none, to the Commission. Any reapplication for association by Cunningham will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any disgorgement ordered against Cunningham, whether or not the Commission has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the conduct that served as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order.
C. For five (5) years from the date of the Order, Cunningham shall not serve as an officer or director of any broker, dealer, investment adviser, or registered investment company.
D. Cunningham shall, upon entry of the Order, pay a civil penalty in the amount of $500,000 and disgorgement in the amount of $1 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Stop 0-3, VA 22312; and (D) submitted under cover letter that identifies Raymond R. Cunningham as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Randall J. Fons, Regional Director, Securities and Exchange Commission, 1801 California Street, Suite 1500, Denver, Colorado, 80202. Such civil money penalty may be distributed pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002 ("Fair Fund distribution"). Regardless of whether any such Fair Fund distribution is made, amounts ordered to be paid as civil money penalties pursuant to this Order shall be treated as penalties paid to the government for all purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, Respondent agrees that he shall not, after offset or reduction in any Related Investor Action based on Respondent's payment of disgorgement in this action, further benefit by offset or reduction of any part of Respondent's payment of a civil penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the Penalty Offset to the United States Treasury or to a Fair Fund, as the Commission directs. Such a payment shall not be deemed an additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a private damages action brought against Respondent by or on behalf of one or more investors based on substantially the same facts as alleged in the Order instituted by the Commission in this proceeding.
By the Commission.
Jonathan G. Katz
Secretary