There were no specific regulations – and minimal SEC guidance – for fund managers to reference prior to 2015 when allocating expenses between themselves and their funds. To fill this void and protect investors, the SEC announced in 2015 and 2016 that private fund fee and expense practices would be a priority of its Office of Compliance Inspections and Examinations. A flurry of enforcement actions followed, targeting practices often viewed as “market” by hedge fund managers at the time. Fund managers must study those actions to date to ensure they do not commit the same violations highlighted by the SEC. To illuminate best practices for fund managers to avoid expense allocation violations, the Hedge Fund Law Report spoke with top practitioners in the industry and examined SEC enforcement actions and statements by SEC staff. This article, the first in a three-part series, outlines trends in the types of expense allocations most aggressively scrutinized by the SEC. The second article
will examine the flaws in disclosures to investors and the gaps in policies and procedures of managers that frequently result in expense allocation violations. The third article
will describe best practices fund managers should adopt to prevent violations, as well as remedial actions to take upon discovering the improper allocation of an expense. For additional coverage of expense allocations, see “Battle-Tested Best Practices for Private Fund Expense Allocations
” (Oct. 10, 2014); and our two-part series entitled “How Should Hedge Fund Managers Approach the Allocation of Expenses Among Their Firms and Their Funds?”: Part One
(May 2, 2013); and Part Two
(May 9, 2013).