Today the Securities and Exchange Commission (SEC) announced a fine against Ensign Peak Advisors (EPA) and The Church of Jesus Christ of Latter-day Saints, of which the EPA fund is an integrated auxiliary.
This news story has been widely shared and could be misrepresented by Church critics. To better understand the case, we reached out to several knowledgeable securities attorneys, including one of the top securities legal experts in the West, who agreed to speak about the case.
Below is a quick Q&A for those curious about the story and its broader implications:
What is Ensign Peak Advisors?
EPA is an investment management firm that manages the investment portfolio of The Church of Jesus Christ of Latter-day Saints. The firm was founded in 1997 and is based in Salt Lake City, Utah. EPA manages a diverse investment portfolio that includes publicly traded stocks, bonds, and other assets. EPA was reorganized in 2000 and split into several subsidiary LLCs.
Why does a Church need an investment management firm?
Like any organization, a church has expenses and income that need to be managed. This firm helps to manage its financial resources and ensure the long-term sustainability of its mission and programs—helping the Church create and manage an investment portfolio that maximizes its financial resources and to help it ultimately further its charitable and exempt purposes.
EPA has been effective in helping the Church of Jesus Christ maintain a high degree of financial independence and self-sufficiency while planning ahead toward long-term goals. This approach has allowed the Church to support its members and communities around the world while maintaining a strong financial position for the future.
How much money is invested in Ensign Peak?
In its most recent filing (Q4 2022), EPA reported having $44.4 billion invested in stocks and bonds. EPA holds other investments as well, and the total value has been claimed to be more than $100 billion.
What do Ensign Peak Advisors invest in?
EPA has a reputation for sound, conservative investment practices. It invests largely in blue-chip stocks. In its most recent filings, some of its largest investments were in companies such as Apple, UnitedHealth, and Johnson & Johnson.
Tony Semerad reports for the Salt Lake Tribune that “they (EPA) eschew debt in keeping with the faith’s tenets and steer clear of investments Latter-day Saints consider objectionable, such as tobacco or gambling stocks.”
What is the role of the SEC?
The SEC (Securities and Exchange Commission) is a US federal government agency that is tasked with overseeing the financial markets, including stocks, bonds, and other similar investments. Their role is to ensure fair, orderly, and efficient markets in order to protect investors.
Why was the SEC investigating Ensign Peak Advisors?
In 2019, the SEC contacted EPA with concerns over EPA’s disclosure reporting practices. Based on the advice of its attorneys, between 2000-2019, each subsidiary LLC had been filing its own form 13F rather than filing one aggregate form. The SEC’s investigation focused on this previous practice of separate reporting.
Based on the SEC’s direction, EPA started reporting through one aggregate report in 2020.
What is form 13F, and why is it important to disclose?
Form 13F is a quarterly report that must be filed by institutional investment managers with more than $100 million in stocks, bonds, and other securities. The information disclosed in form 13F is used by regulators and other market participants to monitor market activities.
Is it unusual for the SEC to investigate an investment management firm?
No. Investigations of this type are quite common, especially for large investment funds.
Did Ensign Peak Advisors ever hide its stock holdings?
There are no allegations that they did. Each of EPA’s subsidiaries reported their holdings. So all of the fund’s holdings were disclosed through form 13F reports for each individual affiliated entity. EPA and the Church have stated that they believe all of their holdings were reported.
Were the “shell companies” the EPA used illegal?
There’s no allegation that they were. These companies are the subsidiary LLCs that EPA used to reorganize in 2000. Most shell companies are used for legitimate purposes, particularly in the financial sector. They can be used to legitimately maintain the privacy of investors or better organize financial assets. The SEC’s claim is not that EPA’s organizational scheme was fraudulent, but that using that organization, EPA should have reported differently than they did.
If nothing was hidden and the organization was legal, why was the SEC concerned?
Because the subsidiaries were all under the control of EPA the SEC believed they needed to file one joint form 13F.
No accusations have been made that EPA abused the separate filings to gain advantage, but the separate filings could in theory have made it possible to do so.
Did Ensign Peak Advisors benefit financially from filing separate reports in any other way?
There have been no allegations by the SEC of insider trading, accounting fraud, market manipulation, or other practices relating to the Church’s investment management firm.
What was the conclusion of the investigation?
The SEC fined EPA and the Church $5 million.
How does that penalty compare to other penalties? Was it too high or too low?
In the fiscal year 2022, the SEC recovered $4.19 billion in penalties. The average penalty was $5.51 million.
Is getting fined by the SEC a big problem for an investment fund or relatively common?
Obviously, a fund never wants to be fined. But fines like this are common. About 5% of investment funds are fined by the SEC each year. Experts compare it to a traffic ticket.
These kinds of investigations are also especially common when multiple entities are involved, such as in the case of the EPA.
Did senior Church leaders know about this reporting approach?
This question was answered via the Church’s statement and FAQs. “The Church’s senior leadership received and relied upon legal counsel when it approved of the use of the external companies to make the filings. Ensign Peak handled the mechanics of the filing process. The Church’s senior leadership never prepared or filed the specific reports at issue.”
Is it unusual for a non-profit or religious organization to be penalized by the SEC?
Nonprofit organizations, like for-profit organizations, come in many different varieties. It is not unusual for the SEC to monitor fund activity, whether that fund is ultimately managed by a for-profit or not-for-profit entity.
Is the Church contesting the penalty?
No. The Church of Jesus Christ has repeatedly stated its desire to work with regulators to ensure they are in compliance with the law and cooperate with the investigation. They jointly came to a negotiated settlement with the SEC.
Does the evidence suggest that Ensign Peak Advisors purposely violated the SEC’s disclosure requirements? Are Ensign Peak Advisors and/or the Church of Jesus Christ culpable for breaking the law?
The SEC’s announcement included nothing of the sort. And these regulations don’t really work that way. As this same lawyer said, “Yes, there are rules that dictate how money managers disclose the existence of funds. But there is no culpability requirement to trigger a penalty or a violation of these rules. Sometimes mistakes are made, and often inadvertently are, but that doesn’t mean there was any intention in the violation and certainly does not mean a crime has been committed. Most penalties imposed by the SEC are the result of unintentional violations.”
The regulatory systems in place by the SEC are very complex—according to one lawyer, “some of the most complex disclosure regimes found anywhere on the planet.” Even very sophisticated financial professionals don’t always fully understand the nuances of those regulations. A large number of fines take place simply because of a misunderstanding of various overlapping rules.
The Church and EPA obviously hire experts and have to rely upon those experts to give advice regarding compliance with all applicable laws and regulations, including SEC regulations.
Will this harm the Church’s non-profit status?
No. Non-profit status is based on the mission of the organization and related factors.
Should Latter-day Saints be worried that the fund is not being managed well?
EPA has a reputation for strong money management. While any fine is obviously disappointing for those involved, experts note that it is more surprising that the SEC hasn’t audited and found errors in the EPA’s reporting practices until now. This suggests a strong history of compliance.
Will tithing money be used to pay the penalty?
No. The penalty will be paid from investment returns.
Will this penalty impact the ability of the Church to fund its mission?
No. Because these funds are coming from investment returns, they won’t have any effect on the Church’s ability to fund its mission.
Should we expect further investigations of Ensign Peak Advisors?
It’s certainly possible. The EPA fund at issue is a large fund. As such, it will continue to be held under scrutiny.
In addition, there have been efforts by detractors to have EPA investigated by both the IRS and the Senate Finance Committee. But experts suggest that these complaints lack legal merit and are not likely to be acted on.
The current SEC matter against EPA is completely resolved, and EPA’s current reporting practice is considered by the SEC to be in complete compliance.
If these kinds of fines are so common, why has there been so much media coverage?
We can only speculate why individual newsrooms have decided to report on the story, but as media professionals, we see that this story has several elements that would be attractive to journalists that have nothing to do with the severity or unusualness of the matter.
The Church of Jesus Christ is still a curiosity for many Americans, and as a result, articles that can refer to the Church in their headlines generate more traffic. And because of the Church’s position on moral issues, it can be used as a lightning rod in culture war debates, which can motivate both journalists and their readers. Moreover, EPA is considered a large fund and manages a large sum of money. All these reasons taken together could generate sufficient newsworthiness.
What changes have Ensign Peak Advisors made to avoid these issues in the future?
This was a narrow issue. And the narrow issue has been fixed for more than three years now. While it is unfortunate that there was ever a misunderstanding about disclosure requirements based on the advice of counsel, it’s also probably unavoidable that in its more than 25-year history EPA would make some mistake on its disclosure requirements. Once again, its overall record on compliance is impeccable.
What do this investigation and penalty say about the Church’s priorities and values?
Not much. The Church invests in its fund to fulfill its mission, which in addition to its religious mission, includes humanitarian aid that totaled nearly a billion dollars last year.
While it’s appropriate that the Church expressed regrets for mistakes made, these kinds of fines are commonplace even among organizations doing their best to be in compliance because of the extraordinarily complicated nature of the regulations.
