Advisers Settle SEC Charges for Improper Fee Calculations

Two affiliated investment advisers settled SEC charges for failing to fully disclose their fee calculation practices, resulting in millions of dollars in excess fees charged to private equity funds they advised.

According to the Order, the SEC found that one of the advisers charged fees for certain ancillary and underwriting services on a cost plus margin basis. In addition, the SEC determined that as part of the calculation of the cost component of the fees, the adviser improperly included the anticipated U.S. income tax liability of its founder attributed to the adviser's income from the fees. The SEC said that the adviser's founder remediated the issue and reimbursed the affected funds after being made aware of the issue. The SEC said that while it did not believe the founder was aware of the misconduct prior to it being flagged, the advisers did not implement supervisory policies designed to prevent securities law violations in connection with conflicts of interest and disclosure of fees charged to advisory clients.

As a result, the SEC found that the advisers violated IAA Section 206(2) and 206(4) ("Prohibited transactions by investment advisers"), IAA Rule 206(4)-7 ("Compliance procedures and practices") and Rule 206(4)-8 ("Pooled investment vehicles"). To settle the charges, the advisers agreed to (i) cease and desist and (ii) pay a civil monetary penalty of $11,200,000.