Against a backdrop of growing anxiety over fee disclosures, the Securities and Exchange Commission (SEC) charged a San Diego-based fund of funds manager and its principles for allegedly hiding revenue sharing payments received from underlying fund investments.
A crucial element to the SEC’s case was that the advisor’s Form ADV, as well as the funds’ PPMs, included disclosures that only said the firm “may” receive revenue sharing from underlying fund investment. The SEC said this disclosure was misleading because the firm had already been receiving revenue sharing payments and failed to inform LPs about the “sources, recipients, amounts and duration of the fees”. The PPM disclosure was also considered “buried” on page 60 of the document, the SEC said in its order.
The charges come on the heels of a Bloomberg report that revealed more than half of about 400 private equity firms examined by SEC staff have “charged unjustified fees and expenses without notifying investors”, leading to speculation that more enforcement cases on the matter are on the way. Similar SEC charges against Clean Energy Capital are proceeding, as previously reported on PE Manager.
The specifics of the case are that Total Wealth Management placed roughly 75 percent of its 481 client accounts into a family of private funds it owned that ultimately invested in outside funds which Total Wealth established a revenue-sharing agreement with, according to the SEC. This created a “clear of conflict of interest” that was not adequately disclosed to investors.
“Although revenue sharing is not per se illegal, it may not be possible to include enough disclosure to satisfy the staff that a firm has cured the inherent conflict of interest,” said Todd Cipperman, founding principal of Cipperman Compliance Services, in a blog posting.
In addition, Total Wealth fired a compliance officer who wanted to disclose the revenue-sharing agreement “more fulsomely” in early versions of the firm’s Form ADV, the SEC said.
“Investment advisers owe a fiduciary duty of utmost good faith and full and fair disclosure to their clients,” said in a statement Michele Wein Layne, director of the SEC's Los Angeles regional office.
Total Wealth was unable to immediately respond to a request for comment.
An administrative judge will rule on the SEC’s allegations and must make a decision within 300 days.