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SEC Warns Public Pension Funds About Inadequate Compliance Procedures
The Securities and Exchange Commission today issued a report reminding public pension funds of their responsibilities under the federal securities laws, and warning them that they assume a greater risk of running afoul of anti-fraud and other provisions if they do not have adequate compliance policies and procedures in place to prevent wrongdoing in their money management functions.
The Commission's Report of Investigation stems from an insider trading inquiry into stock purchases by The Retirement Systems of Alabama (RSA), a state pension fund. RSA purchased shares of The Liberty Corporation while in possession of material, non-public information about the prospective acquisition of Liberty. RSA learned about the transaction because it was to provide financing for the acquisition. RSA did not have any program, policy, practice, or training to ensure that its investment staff understood and complied with the federal securities laws in general, or insider trading laws in particular. When the information became public, the value of RSA's Liberty shares increased by more than $700,000.
"Today's report reminds public pension funds of their obligations to prevent fraud and protect investors," said SEC Chairman Christopher Cox. "While public pension funds are exempt from most of the federal securities laws governing other money managers, they are not exempt from important anti-fraud provisions that prohibit insider trading and other manipulative and dishonest behavior that threatens the integrity of our markets. It is vitally important, therefore, that they have appropriate policies and procedures."
Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, added, "When public pension funds and other unregulated money managers come into possession of material non-public information, they operate at their own peril if they do not have safeguards specifically designed to prevent the misuse of inside information."
RSA purchased the Liberty shares in August 2005, when RSA knew about a prospective acquisition of Liberty by Raycom Media, Inc. for a substantial premium over Liberty's market price. RSA had previously acquired confidential information about Liberty in connection with the pension fund's arranging to serve as a source of funding to Raycom for the acquisition.
In resolving its inquiry into RSA's trading with a Report of Investigation, the Commission took the following into consideration.
- RSA took remedial action that the Commission might have sought in an enforcement proceeding, including adoption of a compliance program and compensation to the sellers of the Liberty stock that it purchased.
- RSA cooperated in the investigation.
- RSA's trading was directed by its CEO, who cooperated in the investigation and authorized RSA's remedial action.
- No individual personally profited from RSA's trading.
A copy of the report, issued pursuant to Section 21(a) of the Securities Exchange Act, is available at www.sec.gov/litigation/investreport/34-57446.htm.
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