July 9, 2012

Securities regulators have issued Wells notices to Guggenheim Funds Investment Advisors, as well as a current and former employee, related to inadequate disclosure of certain investments within a now-liquidated closed-end fund.

Guggenheim, a subsidiary of Guggenheim Partners, said in a regulatory filing it received the Wells notices from the Securities and Exchange Commission in April and that commission staff intends to “recommend to the SEC that action be brought against the investment adviser and the current and former employee for allegedly failing to cause the fund to adequately disclose certain investments made by the fund.”

Guggenheim’s disclosure described an examination the SEC conducted in 2009 and said that the following year SEC staff told the adviser it believed “certain deficiencies existed in connection with the management of” one of its closed-end funds.

Guggenheim has “vigorously responded” to the SEC allegations and “believes its disclosures were proper,” the firm said in its filing, originally made mid-June. The disclosure came a week after a mutual fund series trust, Northern Lights Fund Trust, revealed that the SEC sent it, certain current and former directors and the trust’s chief compliance officer Wells notices.

The Northern Lights case appears to focus on the 15(c) contract renewal process and disclosure of that process related to certain funds that were once part of the trust, according to regulatory filings. Industry attorneys caution against connecting that Wells notice to the one issued to Guggenheim, saying there isn’t enough information to do so.

Industry attorneys also say there isn’t enough detail in the Guggenheim disclosure to give fund directors a sense of matters about which they should ask their own adviser. Bruce Leto, partner at Stradley Ronon, says given the timing of the SEC’s investigation into Guggenheim, the notice may relate to information not properly disclosed to the fund board or to shareholders about securities that rapidly lost value during the 2008 market crisis.

When a matter is not properly disclosed, the SEC can bring an action under Section 24(b) of the ’40 Act, which requires funds to file any advertisements, pamphlets or other sales literature with the SEC, and can be used against an adviser when the commission finds fault with disclosure.

“If they’re going after the adviser for an antifraud action, they’re going to look to see if something was not disclosed properly,” Leto says, speaking generally about ways the SEC can bring action against a fund adviser. “The hook that’s going to allow them to bring an enforcement action is 24(b).”

Legal experts have noted in recent weeks that the SEC appears to be focused on funds’ disclosures.