Fund Manager to Repay Over $600,000 in Performance Fees from Non-Qualified Clients
A fund-of-funds manager agreed to pay a fine and reimburse over $600,000 in performance fees unlawfully charged to non-qualified fund investors. Although the funds’ subscription documents included representations that the investor qualified under Rule 205-3 to allow the fund manager to accept a performance fee, according to the SEC, nearly all of the investors failed to complete that section of the subscription documents. Additionally, many of the investors were not accredited investors. The SEC also charged the firm’s principal with aiding and abetting the violations. Section 205 of the Advisers Act and Rule 205-3 prohibit an adviser from accepting a performance fee except from qualified clients which include a person with a net worth in excess of $2 Million or a qualified purchaser (generally, institutions).
OUR TAKE: Advisers sometimes forget that the “qualified client” definition, required to accept performance fees, is a higher standard than “accredited investor.” These types of cases may become more prevalent as the SEC enforces the heightened due diligence requirements related to the JOBS Act.