By Dave Michaels
WASHINGTON -- Prudential Financial Inc. agreed to pay $32.6 million to settle claims that it didn't disclose how a reorganization of its mutual-fund business would cost the funds millions in lost interest income.
The Securities and Exchange Commission on Monday said the 2006 reorganization -- intended to engineer tax benefits for Prudential -- created a conflict of interest because the company benefited while the funds lost income from securities lending. They also paid higher taxes in certain foreign jurisdictions. In addition to paying the fines, Prudential reimbursed over $155 million to the funds, the SEC said in a settlement announcement.
"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," said Dabney O'Riordan, co-chief of the SEC's asset-management unit in its enforcement division. Prudential's subsidiaries "acted to benefit their parent company despite the costs those acts imposed on their clients."
The allegations derived from Prudential's decision to recall from 2005 through 2015 various fund securities on loan to banks and other traders. Mutual funds routinely lend stocks or bonds they own as a way of boosting returns. Prudential's decision to recall the securities from borrowers allowed it to receive dividends that were deductible for tax purposes, the SEC said.
Prudential received more than $229 million in tax benefits from 2005 through 2015 due to the practice, the SEC said. During the same time, the funds didn't receive securities-lending revenue and other income worth $72 million, the agency said.
Prudential neither admitted nor denied the claims but said in a statement that it reported the conduct to the SEC and cooperated with regulators. The company "has a long track record of being transparent and maintaining constructive relationships with regulators," the company said.
The SEC said in its settlement order that Prudential employees didn't fully disclose the problem to regulators when Prudential underwent a routine regulatory examination in 2014. The issue surfaced after an employee of Prudential's securities-lending agent mentioned it in 2015 to a Prudential senior compliance officer, which triggered an internal investigation, the order said. The company reported the problems to the SEC in 2016, the order stated.
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