Investment Adviser Fined for Management Fee Overcharges

An investment adviser ("Adviser") settled SEC charges for imposing excess management fees and failing to disclose conflicts of interest.

In the Order, the SEC stated that the Adviser's management fees, as set out in limited partnership agreements ("LPAs"), were calculated based on the "acquisition cost of the portfolio investments held by the funds." In the LPAs, the Adviser stipulated that it would reduce the management fees in the event that a portfolio investment was determined to have "suffered a ‘permanent impairment’ in value." The SEC found that the Adviser failed to (i) accurately adjust its calculations for instances of permanent impairment because it analyzed impairments at the portfolio company level, not the portfolio investment level as per the LPAs, and (ii) disclose to investors the existence of a conflict of interest relating to its permanent impairment calculation criteria.

Further, the SEC stated that the Adviser did not have adequate written policies and procedures to ensure regulatory compliance and as a result violated Advisers Act Sections 206(2) and (4) ("Prohibited transactions by investment advisers") and Rules 206(4)-7 ("Compliance procedures and practices") and 206(4)-8 ("Pooled investment vehicles") thereunder.

To settle the charges, the Adviser agreed to (i) cease and desist from any further regulatory violations, (ii) a censure, (iii) a disgorgement of $773,754 and prejudgment interest of $91,204 and (iv) pay a civil money penalty of $1,500,000.