SEC Fines Liquid Alts Advisor for Not Maintaining Cash Collateral With Custodian

The U.S. Securities and Exchange Commission (SEC) has fined New York-based Water Island Capital, an investment adviser to several alternative mutual funds, $50,000 due to the advisor allegedly maintaing cash collateral at broker-dealers rather than the funds’ custodian.

Water Island Capital, which manages both hedge funds and liquid alternatives, agreed to pay the fine after consenting to the SEC’s cease-and-desist order without admitting or denying the findings.

The SEC requires investment companies that keep securities with a custodian must also keep other cash assets (in this case cash collateral) with the custodian. In this case, the SEC says that Water Island Capital did not ensure that roughly $247 million in cash collateral, coming from certain swaps transactions, was maintained with the funds’ custodian.

“Mutual funds must ensure that all fund assets are properly protected,” says Andrew Calamari, director of the SEC’s New York Regional Office. “Water Island Capital failed to implement the required policies and procedures to ensure all cash collateral was held in the custody of the funds’ bank.”

In addition to violating the SEC’s custody provision, the SEC says Water Island Capital failed to implement the funds’ directed brokerage policies and procedures, which required the firm to create and maintain an approved list of executing brokers for the funds as well as to document the funds’ compliance with the directed brokerage requirements or pursuant to the funds’ policies and procedures.