Massachusetts Alleges that Adviser Shouldn’t Have Charged Performance Fee
The Massachusetts Securities Division instituted administrative proceedings against an unregistered fund manager for unlawfully charging a performance fee in addition to misleading investors. The MSD asserts that the respondent unlawfully “householded” an elderly client’s assets with a nephew with power of attorney in order to meet net worth thresholds required to charge a performance fee. Massachusetts law prohibits charging performance fees in violation of Rule 205-3 of the Advisers Act, which limits performance fees. In addition to other sanctions, the MSD seeks to prohibit the respondent from registering as an exempt reporting adviser.
OUR TAKE: Expect more cases like this where the state regulators take the enforcement lead. This is a rare case specifically alleging violations of the performance fee rule. Also, securities lawyers and compli-pros should take notice that (i) the Massachusetts statute makes it unlawful to violate an SEC rule that would otherwise apply only to SEC-registered advisers and (ii) the MSD seeks to prohibit federal exempt reporting adviser registration as a remedy.