Since early 2015, when it announced that private fund fee and expense allocation practices would be an enforcement priority, the SEC has pursued actions against managers for an array of improper fee and expense allocations. These enforcement actions frequently alleged inadequate disclosure or deficient policies and procedures. This article, the second in a three-part series, examines inadequacies in disclosures that often lead to SEC enforcement actions and provides guidance for how managers should disclose fee and expense allocations going forward. For more on disclosure to investors, see “Growing SEC Enforcement of Hedge Fund Managers Requires Greater Focus on Cybersecurity and Financial Disclosure” (Jul. 7, 2016); and “Are Hedge Fund Managers Required to Disclose the Existence or Outcome of Regulatory Examinations to Current or Potential Investors?” (Sep. 16, 2011). This article also summarizes the types of allocation scenarios and other recommended features managers should include in their written expense allocation policies and procedures. For additional coverage of manager compliance programs, see “Four Essential Elements of a Workable and Effective Hedge Fund Compliance Program” (Aug. 28, 2014). The first article in this series detailed trends in the types of expense allocations most aggressively scrutinized by the SEC. The third article will describe practices managers should adopt to prevent violations, as well as remedial actions to take upon discovering the improper allocation of a fee or expense. For additional coverage of expense allocations, see “Dechert Global Alternative Funds Symposium Highlights Trends in Hedge Fund Expense Allocations, Fees, Redemptions and Gates” (May 21, 2016); and “Barbash, Breslow and Rozenblit Discuss Hedge Fund Allocations, Restructurings and Advisory Boards” (Apr. 7, 2016).
Sep. 8, 2016
Flawed Disclosures to Avoid – and Policies and Procedures to Adopt – for Managers to Reduce Risk of SEC Scrutiny of Fee and Expense Practices (Part Two of Three)
- Rorie A. NortonHedge Fund Law Report
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Other Allocation of Expenses Articles
Jan. 17, 2019
Allegations That Private Equity Manager Misallocated Expenses and Failed to Disclose Conflicts of Interest Result in Nearly $3 Million in Disgorgement and Fines
Jan. 10, 2019
Improper Expense Allocations and Careless Valuation Practices Result in Nearly $4 Million in Fines and Disgorgement for BDC Adviser
Oct. 25, 2018
How Should Hedge Fund Managers Approach the Allocation of Expenses Among Their Firms and Their Funds?
Oct. 26, 2017
Best Practices for Expense Allocation and Fee Practices: High-Risk Allocation Practices, Inadequate Disclosures and Remedying Improper Allocations
Sep. 7, 2017
Improper Use by Managers of Fund Cash to Pay Other Funds’ Legal Expenses May Result in Serious Penalties