December 6, 2021

Volume XI, Number 340

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December 03, 2021

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SEC Settles Enforcement Proceeding Without Imposing a Penalty Against Adviser That Self-Reported Alleged Expense Waiver Misrepresentations

On September 30, 2020, the SEC announced that it had settled administrative proceedings against an investment adviser for alleged compliance policy deficiencies and prospectus misrepresentations relating to the adviser’s recoupment of previously waived fund operating expenses for four money market funds, causing the funds to incur approximately $5.2 million in additional expenses.

According to the SEC’s order, the adviser’s contractual expense limitation agreements with the funds required the adviser to waive fees and/or reimburse fund expenses to the extent necessary to limit each fund’s total operating expenses to an agreed-upon expense cap, which was disclosed in various fund filings. In addition to the contractual expense caps, the adviser had voluntary expense limitations with the funds intended to prevent the funds from experiencing a negative yield and that entitled the adviser to recapture waived fees or reimbursed expenses during the ensuing three year period, so long as the recouped amounts did not result in negative yields for the funds. The SEC alleged that the adviser recaptured waived or reimbursed expenses under the voluntary arrangement that resulted in the funds exceeding their contractual expense caps. According to the SEC’s order, the fee table in the funds’ prospectuses omitted the expenses associated with the recaptured amounts under the voluntary agreements and failed to inform investors that the funds exceeded their disclosed expense caps for the funds’ most recent fiscal year. These alleged disclosure misrepresentations meant that the adviser failed to implement its written policies and procedures explicitly requiring recaptured expenses to be included within the “Other Expenses” line item of the fee table.

In light of the adviser’s alleged prospectus misrepresentations and deficient policies and procedures, the adviser agreed to a censure and payment of disgorgement and prejudgment interest. In determining not to impose a civil penalty on the adviser, the SEC cited the adviser’s self-reporting to the SEC, prompt remedial action, including hiring a third-party consultant to quantify the harm to affected investors, and cooperation with the SEC staff’s investigation.

The order is available here.

© 2021 Vedder PriceNational Law Review, Volume X, Number 316
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About this Author

John Marten Investment Attorney Vedder Price Law FIrm
Shareholder

John S. Marten, a Shareholder in the Chicago office of Vedder Price, has substantial experience representing clients in the investment management industry.

As a member of the firm’s Investment Services group, Mr. Marten counsels clients on a wide variety of matters involving the application of the federal securities laws to investment companies, investment advisers and broker-dealers. He has significant experience counseling investment company clients with respect to new products and was recently involved in the creation of two mutual funds...

(312) 609 7753
Nathaniel Segal Investment Attorney Vedder Price Law Firm
Counsel

Nathaniel Segal is counsel at Vedder Price and a member of the Investment Services group. He focuses his practice on investment companies and investment advisers in connection with the organization and operation of investment products and services, including traditional mutual funds, closed-end investment companies (including interval funds and listed closed-end funds), variable insurance products and registered hedge funds, as well as mutual funds utilizing complex hedging and absolute return strategies. Mr. Segal has experience in conducting transactional due diligence...

(312) 609 7747
Jacob Tiedt,Vedder Price law firm investment services attorney
Shareholder

Jacob C. Tiedt is a Shareholder at Vedder Price and a member of the Investment Services group.

Mr. Tiedt’s practice includes the representation of registered mutual funds, closed-end funds and exchange-traded funds; private funds; investment advisers; and other financial institutions on a broad range of regulatory, governance and compliance matters. Mr. Tiedt regularly counsels clients on matters relating to SEC registration, disclosure and compliance; shareholder solicitation; NYSE, Nasdaq and FINRA regulation; corporate governance; and board administration. Mr....

312-609-7697
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