Two US subsidiaries of financial services giant Prudential Financial have been censured by the US Securities and Exchange Commission (SEC) for failing to disclose conflicts of interest and making misleading disclosures, after they were reorganised so that Prudential received over $200m (£160m) in tax benefits to the detriment of funds they advised
The US regulator said Prudential subsidiaries AST Investment Services Inc and PGIM Investments (PI) served as investment advisers to 94 insurance-dedicated mutual funds. In 2006, the funds were reorganised so that Prudential could receive certain tax benefits which amounted to $229m through changes to the way in which dividends were received on securities held by the fund.
However, there were negative consequences to the funds. First, AST and PI cost the funds some $72m in lost interest income when they temporarily recalled securities the funds had out on loan.
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.
Secondly, the funds' reorganisation subjected them to less favourable tax treatment in certain foreign jurisdictions. Prudential said it would reimburse the funds for these additional taxes or other adverse effects resulting from timing differences in the receipt of refunds from foreign tax authorities, but failed to do this within the timeframe agreed, despite AST and PI's assurance it would do so.
By March 2018, Prudential owed the funds more than $58.6m in past-due foreign tax reimbursements for the periods from January 2006 to March 2018. In addition, the funds did not receive approximately $25m in additional investment income they would have earned on that revenue had it been paid when due.
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 $155m. They have also been required to disgorge an additional $27.6m, pay a civil monetary penalty of $5m, and cease and desist from committing any further violations. AST and PI did not admit or deny the SEC's findings.
Dabney O’Riordan, co-chief of the SEC enforcement division's asset management unit, 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.
‘Here, AST and PI acted to benefit their parent company despite the costs those acts imposed on their clients.’
SEC order PGIM Investments and AST Investment Services
