US SRI manager pays $500k SEC fine for violating its own ethical screens

Pax World Management, the US socially responsible mutual fund house, has agreed to pay a $500,000 (€321,000) fine to resolve charges from the Securities & Exchange Commission (SEC) that its funds failed to follow their own socially responsible investing rules over a five-year period from 2001-2005. During this time, two of its funds, the Pax World Growth and Pax World High Yield funds invested in off-limits industries such as gambling, alcohol, oil and gas exploration.
The settlement is believed to be one of the first such cases involving an SRI fund manager. Industry observers believe the decision could lead to increasing regulatory oversight of the claims made by SRI funds, notably in the US where SRI funds run approximately $2.7 trillion in assets, according to the Social Investment Forum.
The SEC settlement order with Pax World, says the manager purchased 41 securities that were either not socially screened prior to purchase or had failed a screen. Of these, it said 10 failed Pax World’s social screens and therefore should never have been purchased.The order says that while Pax World made efforts to re-screen portfolio securities on a periodic basis, it did not continuously re-screen its securities as described in fund prospectuses.
Pax is understood to run mutual fund accounts for more than 100,000 investors.
Joseph Keefe,
president and CEO of Pax, who joined the company after the start of the SEC investigation in December 2004, said: “Under the terms of the settlement, Pax has agreed to a cease and desist order and a civil penalty of $500,000. We have specifically settled claims under Section 206(2) of the Investment Advisers Act, which I would note is a section involving negligent conduct, not intentional wrongdoing.”
Keefe said the portfolio managers of the two funds as well as the head of the Social Research Department, and Pax World’s outside counsel and chief compliance officer are no longer employed by the firm.