Capital Fund Adviser Settles SEC Charges for Misleading Statements on Fees

The SEC charged a capital fund adviser group with making misleading statements about its management fees and engaging in inter-fund transactions in breach of fund operating agreements.

In its Order, the SEC found that the capital fund adviser group (operating as an "exempt reporting adviser" under Adviser's Act Section 203(l) ("Venture Capital Funds"), represented to clients that its management fee was the "industry standard '2 and 20' ", meaning that the group would collect a two-percent management fee each year and a separate twenty-percent performance fee. The SEC found, however, that the group was receiving management fees totaling twenty-percent of an investor’s initial investment. Further, the SEC found that the group’s CEO approved of the language used and made the same misleading statement to clients.

The SEC also found that the group made cash transfers between funds and made loans to certain funds in violation of the funds’ operating agreements. As a result of these acts, The SEC determined that the fund adviser group violated Investment Advisers Act, Sections 206(2) ("Prohibited Transactions - Anti fraud Provisions"), and 206(4) ("Provisions to prevent fraudulent, deceptive or manipulative acts with respect to any investor or prospective investor in the pooled investment vehicle”), and that the CEO caused these violations.

To settle the charges, the group agreed to (i) a cease-and-desist order, (ii) a censure, (iii) a $700,000 penalty, and (iv) a $100,000 penalty to be paid by the CEO.