Mutual Fund Manager and CFO/CCO Fined for Misleading Board about Profitability
The SEC fined and censured a mutual fund manager and its CFO/CCO for over-allocating certain expenses and thereby misleading the fund board about profitability during the contract review process. During the annual advisory agreement renewal review required by Section 15(c) of the Investment Company Act, the CFO/CCO presented a profitability report that purported to allocate CEO compensation based on total hours worked on the funds. However, the SEC alleges, the CFO/CCO allocated the compensation in a manner that would smooth the total profitability year over year. The SEC accuses the CFO/CCO of failing to disclose to the Board that he “considered other factors beyond estimated labor hours.”
OUR TAKE: The SEC has said that it would increase scrutiny of the Board process involved with reviewing advisory agreements. The SEC has not provided guidance about how to ensure the proper allocation of internal expenses for the purposes of showing product-specific profitability. However, at the very least, management must accurately and fully describe how it did the allocation.