Fund Manager Took Performance Fees without Exceeding High-Water Mark
A private fund manager and its principal were fined and ordered to pay disgorgement for charging an unearned performance fee and other compliance violations. The SEC asserts that the firm and the principal, who also served as the Chief Compliance Officer, charged a performance fee even though the fund did not meet the performance high-water mark, which precluded a performance fee until the fund exceeded its previous high net asset value. The SEC also accuses the respondents of violating the custody rule by commingling assets and failing to deliver audited financials to investors. The respondents also failed to implement a required compliance program, neglecting to implement or test policies and procedures.
The SEC has cited fee calculations as one of its private fund examination focus areas. Firms that advertise a high water mark should create a monitoring system to avoid taking fees when not earned. When a C-suite exec also wears the Chief Compliance Officer dual-hat, nobody owns supervision of the inherent conflicts of interest.