On June 20th, the SEC charged a New York Investment Adviser for excessive management fees and failure to disclose conflicts of interest.
The Firm agreed to pay $1.5 million in penalties and $864,958 in disgorgement and prejudgment interest.
According to the SEC:
- From August 2017 to April 2021, the Firm inaccurately calculated their management fees based on aggregated invested capital at the portfolio company level instead of the individual portfolio investment security level.
- The Firm was also expected to reduce the basis for fees if an investment suffered “permanent impairment”.
- Regulators found the criteria for “permanent impairment” were narrow, subjective, and difficult to satisfy.
- In addition to the troublesome criteria, the Firm also failed to properly disclose the criteria to investors and the conflicts that could arise because of it.
Firms should provide clear and defensible fee structures to clients in all the required documents.
It is important that Firms also have proper policies and procedures in place that provide safeguards to ensure fees are correctly calculated. As always, disclosures should be clear and thorough. Any perceived conflicts must be disclosed to investors.
If your Firm needs professional compliance support to analyze your compliance practices and potentially reduce your regulatory risk, please reach out to us today.