## Facts

- New York Life Investment Management LLC (NYLIM) was a registered investment adviser and adviser to the MainStay Equity Index Fund, a mutual fund designed to track the S&P 500 Index before expenses.
- An NYLIM affiliate, NYLIFE LLC, offered certain investors a 10-year “Guarantee” to make up any shortfall if the value of their shares (including distributions) was less than the amount paid at the end of the period.
- During the advisory contract renewal process from early 2002 through June 30, 2004, the fund’s independent trustees received materials showing NYLIM’s management fees were among the highest in the fund’s peer group.
- NYLIM urged the board to treat the Guarantee as a significant benefit and cost supporting the higher advisory fee, but did not provide information reasonably necessary for the trustees to assess the Guarantee’s cost and its effect on fund profitability.
- NYLIM initially did not disclose the estimated cost/value of the Guarantee or that NYLIFE had established a reserve for expected Guarantee obligations.
- When NYLIM later disclosed a reserve figure, it did not explain key aspects of that figure, including that it reflected changes in the reserve and that it represented the present value of expected future Guarantee payments.
- Only in 2004 did NYLIM provide the assumptions used to calculate the reserve and an explanation of how it believed the reserve should be considered in profitability analysis.
- Investor disclosure documents stated that neither the fund nor its shareholders would be charged for the Guarantee, while NYLIM used the Guarantee internally as a justification for higher management fees.

## Issues

1. Whether NYLIM willfully violated Investment Advisers Act § 206(2) by breaching fiduciary duties through materially incomplete or misleading communications about the Guarantee and advisory fees.
2. Whether NYLIM willfully violated Investment Company Act § 15(c) by failing to furnish the fund’s board with information reasonably necessary to evaluate advisory contract renewals in light of the Guarantee.
3. Whether NYLIM willfully violated Investment Company Act § 34(b) by causing the filing or distribution of materially untrue or misleading statements concerning whether shareholders bore costs related to the Guarantee.

## Decision

- The SEC instituted administrative and cease-and-desist proceedings; NYLIM settled by consenting to an order without admitting or denying the findings (except jurisdiction).
- The SEC found NYLIM willfully violated Advisers Act § 206(2) and Investment Company Act §§ 15(c) and 34(b).
- The SEC ordered NYLIM to cease and desist from future violations and imposed censure.
- The SEC ordered monetary relief totaling $6,100,784 (disgorgement, prejudgment interest, and civil penalties), to be distributed to affected shareholders through a Fair Fund, with any remainder remitted to the U.S. Treasury.

## Legal Principles

- An investment adviser to a registered investment company owes fiduciary duties to the fund and its shareholders; under Advisers Act § 206(2), materially misleading omissions or half-truths that operate as fraud or deceit can violate the statute without requiring proof of scienter.
- Under Investment Company Act § 15(c), an adviser must furnish fund trustees—particularly independent trustees—information reasonably necessary to evaluate the terms of an advisory contract, including the basis for fees and material cost/profitability factors raised by the adviser.
- Under Investment Company Act § 34(b), it is unlawful to make materially untrue or misleading statements, or to omit material facts necessary to make statements not misleading, in documents filed or transmitted under the Act.
- Using a product feature (here, a Guarantee) to justify higher advisory fees while providing investors disclosures suggesting the feature is costless to shareholders can be materially misleading if the communications are not consistent and complete.

## Conclusion

The SEC concluded that NYLIM’s selective and incomplete disclosures about a Guarantee used to support high advisory fees deprived trustees of information needed for informed § 15(c) review and conflicted with investor-facing statements, resulting in willful violations of Advisers Act § 206(2) and Investment Company Act §§ 15(c) and 34(b), and leading to a cease-and-desist order, censure, and substantial monetary remedies.


In re New York Life Inv. Mgmt. LLC, Investment Company Act Release No. 28747 (SEC May 27, 2009)