Fund Manager to Pay over $6 Million for Misleading Board and Investors about High Fees
A mutual fund manager agreed to pay over $6 Million in restitution and fines for allegedly misleading the Board and investors by charging high management fees which it claimed were justified by the costs of a principal guarantee provided by an affiliate. During the 15(c) contract renewal process, the Board was presented with evidence that the fund’s management fees were among the highest in the peer group. The fund manager argued that the high fees were necessary because of the cost of a guarantee feature that guaranteed the return of principal if an investment were held for at least 10 years. According to the SEC, the fund manager did not adequately account for the cost of the guarantee feature. Also, the fund’s shareholder reports and prospectus stated that the guarantee was provided at no cost to shareholders. The SEC alleged violations of the anti-fraud provisions of both the Advisers Act and the Investment Company Act.
OUR TAKE: We think this case is more about excessive fees than disclosure. When a fund carries management fees consistently higher than the peer group, fund management faces an extremely high burden to justify those fees through disclosure. We also find noteworthy that the SEC brought this case as disclosure action rather than a breach of fiduciary duty under 36(b). Finally, we wonder why the SEC did not criticize the independent trustees who consistently approved the management agreement.