SEC zeroes in on The Reserve's B-D

Mar 10, 2009 @ 3:33 pm

By Mark Bruno

The Securities and Exchange Commission may soon take action against the broker-dealer subsidiary of The Reserve, the New York-based firm whose flagship $62 billion money market fund "broke the buck" in September.

SEC officials told members of The Reserve on March 3 that regulators may elect to bring a "civil injunctive and/or institute a public administrative proceeding" against Resrv Partners Inc., the B-D affiliate responsible for distributing the firm's funds, according to a statement from The Reserve.

Frank Bonanno, director of marketing at The Reserve, could not specifically say what, if any, violations of federal securities laws the SEC may be probing at the moment.

An SEC spokesman, who would not confirm or deny any such activity, declined to comment.

In December, the SEC informed officials at The Reserve that they intended to bring some form of enforcement action against the firm's investment adviser affiliate, Reserve Management Co. Inc., the entity that has managed the firm's various money market strategies.

The latest development may simply be broadening the SEC's efforts to include the broker-dealer operation in any possible probes.

The Reserve has been under intense scrutiny since September, when it was revealed that the firm's largest fund — the Reserve Primary Fund — held $785 million in debt issued by Lehman Brothers Holdings Inc. when the New York-based investment bank filed for bankruptcy protection. This Lehman exposure caused the net asset value of the fund, which had $62 billion in assets at the time, to plunge below $1 a share — the first time in more than a decade that a money market fund broke the buck.

The Reserve, which began liquidating the Primary Fund and other funds at the end of last year, has been the subject of an investigation by regulators in Massachusetts.

In a complaint filed in January, enforcement officials in Massachusetts allege that The Reserve made "numerous false and misleading statements" to investors in the Primary Fund last September in an attempt to persuade clients from redeeming their shares in the fund before it broke the buck.


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