Over the last several years, fund managers have tried to explain to the SEC why alleged conflicts of interest or improper fees and expense allocations were not, in fact, violations. These excuses may reflect a temptation for fund managers to explain away these issues, rather than fixing the actual problems. However, by understanding in advance the excuses that the SEC has rejected, managers can avoid this false sense of security if the underlying issues are revealed at any point, up to and including during an SEC examination. For more on SEC examinations, see our two-part series: “What Hedge Fund Managers Need to Know About Getting Through an SEC Examination” (Jun. 16, 2016); and “Fees, Conflicts, Investment Allocations and Other Hot Topics Hedge Fund Managers Should Expect During an SEC Examination” (Jun. 30, 2016). To help our readers avoid the same faulty logic, this article outlines eight excuses that have failed to persuade the SEC and avert enforcement actions or other sanctions when raised by managers. For more on conflicts of interest, see “Seward & Kissel Private Funds Forum Explains How Managers Can Prevent Conflicts of Interest and Foster an Environment of Compliance to Reduce Whistleblowing and Avoid Insider Trading (Part Two of Two)” (Sep. 29, 2016); and “Former SEC Asset Management Unit Co-Chief Describes the Agency’s Focus on Conflicts of Interests and Increased Efforts to Crack Down on Private Fund Managers” (Sep. 15, 2016).
Oct. 13, 2016
Eight Bad Excuses Fund Managers Have Raised Trying to Avoid SEC Sanctions for Fee and Expense Allocation Violations and Undisclosed Conflicts of Interest
- Rorie A. NortonHedge Fund Law Report
To read the full article
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