Longstanding Church Fund Violated Fiduciary Duty

The sponsor of a church fund agreed to pay over $2.25 Million in returned profits, disgorgement, interest and penalties for failing to properly disclose a reserve fund created to smooth returns.  According to the SEC, the Board of the fund, which was launched in 1973, created the reserve fund in 1993 as a vehicle to retain excess profits and ensure liquidity so that the fund could distribute consistent returns between 5% and 6.7%.  The SEC faults the fund sponsor for failing to fully disclose that it would charge fees on the reserve fund and that redeeming investors would not receive their pro rata amounts held in the reserve fund.  OCIE identified the fiduciary violations during a 2014 exam, which followed the sponsor’s registration in 2012.

OUR TAKE: The SEC appears to be most disturbed that the fund sponsor did not return client assets and double-dipped advisory fees by moving assets into the reserve fund.  Private fund firms that registered after 2012 as a result of Dodd-Frank, should audit their operations to determine whether longstanding business practices run afoul of their fiduciary duties.