SEC Charges Investment Adviser and Mutual Fund Board Members with Supervisory Failures (with Lofchie Comment)

The SEC charged a mutual fund adviser, its principal and three mutual fund board members with failing to satisfy their statutory obligations regarding the evaluation and approval of mutual fund advisory contracts.

According to the SEC, Commonwealth Capital Management acted as the investment adviser to various mutual funds within World Funds Trust ("WFT") and World Funds Inc. and was part of a turnkey mutual fund platform that provided various services to small and mid-sized mutual funds.

An SEC investigation found that as part of the "15(c) process," the WFT's board of trustees requested that Commonwealth Capital Management and its owner provide certain information about advisory fees paid by comparable funds, and about the nature and quality of the firm's services. The SEC found there to be no documentary evidence that Commonwealth Capital Management provided, or that the trustees evaluated, fees paid by comparable funds.

Additionally, the SEC found that Commonwealth Capital Management provided incomplete responses about the nature and quality of services provided by it versus those that were provided by the funds' sub-adviser and administrator. The SEC also found that the trustees did not request or receive additional materials. According to the SEC, the trustees approved the advisory contracts without having all of the reasonably necessary information they requested to evaluate the contracts.

Lofchie Comment: This enforcement action provides a useful refresher on the duties of the directors or trustees of a fund in approving advisory and other agreements. The obligation of the directors to institute, and actually to follow, sound procedures is even more pronounced where, as here, insiders and conflicts of interest are involved.

See: SEC Order.