The hedge fund seeding platform created by a large asset manager agreed to pay over $2.7 Million in disgorgement, interest and penalties for over-allocating internal expenses. The respondent created private equity funds to invest in third party hedge fund managers. The firm then created an internal group of employees tasked with helping hedge fund managers in which the funds invested to attract new capital, launch products and optimize operations. Pursuant to their organizational documents, the funds would pay up to 50 basis points for these activities. The SEC charges that the respondent allocated all the group’s compensation expenses to the funds even though they spent a portion of their time on activities that benefitted the fund sponsor and unrelated to the enumerated activities. The SEC faults the firm for failing to implement appropriate compliance policies and procedures and for making material misstatements.
Do not charge expenses to managed funds unless the organizational and disclosure documents are absolutely clear that the funds will bear the expenses. When doing internal expense allocations, always err to the side of benefitting the fund rather than the fund manager.