Death Penalty for Fund Manager that Charged Overhead Expenses to Funds
The SEC imposed the death penalty on a fund-of-funds and barred and fined its principals, including its General Counsel, for paying operational expenses out of the funds the firm managed. According to the SEC, certain feeder funds managed by the adviser paid the adviser’s operational expenses including salaries and benefits, rent, parking, utilities, computer equipment, and IT services. The SEC asserts that the limited partnership agreements did not authorize the payment of such operational expenses and that general PPM disclosure did not constitute sufficient authorization. Also, the firm’s Form ADV did not disclose the payments as additional adviser compensation. The SEC charged the CEO, who also served as the Chief Compliance Officer, and the General Counsel, who the SEC noted came from a small law firm focused on employment law. To settle the charges, the respondents agreed to fines, industry bars, and a winding up of the firm’s operations under the supervision of an independent monitor. The SEC also charged and barred the audit partner of the firm that prepared the funds’ financial statements.
OUR TAKE: The SEC has previously stated that it will crack down on private fund managers charging overhead to funds. Although the SEC asserts lack of sufficient disclosure, we believe that no amount of disclosure will be enough to allow the charging of overhead expenses to clients. The implicit message is that you can only charge clients your management fees.