Expense Allocation Timeline

SEC Charges Fifth Street Management with Expense Misallocation

The SEC charges Fifth Street Management with misallocating $1.3 million in rent, overhead, and employee compensation expenses.

Fifth Street Management settled with the SEC for $1.6 million in penalties and $2.3 in disgorgement with interest. The company subsequently shut down.

Read more December 2018

SEC Charges Lightyear Capital with Expense Misallocation

The SEC charges Lightyear Capital with misallocating $221,000 in shared expenses and failing to provide $1 million in management fee offsets.

Lightyear settled with the SEC for $400,000 in penalties. The SEC noted Lightyear's cooperation and proactive effort to reimburse its funds with interest before being contacted by SEC enforcement staff.

Read more December 2018

SEC Charges Neuberger Berman with Expense Misallocation

The SEC charges Neuberger Berman with misallocating $2 million of employee compensation costs to funds of Neuberger's private equity group, Dyal Capital Partners.

Neuberger settled with the SEC for a disgorgement of $2.3 million and a penalty of $375,000. The SEC noted Neuberger's voluntary remedial efforts and its "extremely prompt and responsive" cooperation.

Read more December 2018

SEC Charges Yucaipa Master Manager with Expense Misallocation

The SEC charges Yucaipa failed to disclose conflicts of interest that led or contributed to the misallocation of nearly $2 million in expenses.

To settle the charges, Yucaipa agreed to undertake independent compliance consulting, pay nearly $2 million in disgorgement and $1 million in penalties.

Read more December 2018

SEC Charges Fifth Street Management with Expense Misallocation

The SEC charges Fifth Street misallocated over $1 million in expenses to its business development corporation clients, among other violations.

The SEC censured Fifth Street and order them to pay $2 million in disgorgement and $1.6 million in penalties.

Read more December 2018

SEC Issues Risk Alert on Fees and Expenses

The SEC highlights expense allocation as a frequent compliance issue and significant risk:

"OCIE staff has observed advisers to private and registered funds that misallocated expenses to the funds. For example, staff observed advisers that allocated [various] expenses to clients instead of the adviser, in contravention of the applicable advisory agreements, operating agreements, or other disclosures."

IntegriDATA Releases EAS 4 with Allocation Intelligence™

IntegriDATA announces EAS 4, a landmark upgrade to EAS. EAS 4 introduces powerful new compliance controls and accounting tools, enabling end-to-end allocation automation for enterprise-class asset managers.

SEC Lists Expense Allocation as 2018 Exam Priority

The SEC OCIE releases its annual list of Examination Priorities which states: "Examiners will review, among other things, whether fees and expenses are calculated and charged in accordance with the disclosures provided to investors."

SEC Charges Platinum Equity with Expense Misallocation

The SEC charges Platinum Equity failed to adopt adequate policies and procedures to ensure the proper allocation of broken deal expenses to its funds.

To settle the charges, Platinum agreed to pay $1.5 million in civil penalties and $1.9 million in disgorgement.

SEC Charges Potomac Asset Management with Expense Misallocation and Other Violations

The SEC charges Potomac Asset Management misallocated over $700,000 in employee compensation, rent, and other expenses. Further, the SEC found Potomac failed to maintain any expense allocation policies or procedures.

The SEC censured Potomac and imposed a $300,000 penalty.

SEC Charges Capital Dynamics with Misallocating Expenses to Funds

The SEC charges Capital Dynamics with expense misallocation and found its allocation policy and procedures offered “insufficient guidance [around the] approval of expenses and [provided] little or no review of approved invoices.”

To settle the charges, Capital Dynamics reimbursed its funds $1.2 million in misallocated expenses and paid a penalty of $275,000.

IntegriDATA Releases EAS 3 with Accounts Payable Features

IntegriDATA announces EAS 3, a major upgrade to EAS. EAS 3 introduces Accounts Payable functionality, turning EAS into the first comprehensive investment management accounts payable solution.

SEC Charges First Reserve Management with Misallocating Expenses to Funds

The SEC charges First Reserve Management with expense misallocation and for failing to pass on discounts to its funds. First Reserve allocated advisory service administrative costs and insurance premiums to the funds without consent. First Reserve also negotiated a discount on its legal fees but did not pass the discount onto its funds.

To settle the charges, First Reserve paid a penalty of $3.5 million and refunded the funds over $8 million.

SEC Charges Blackstreet Capital with Misallocating Fees and Expenses to Funds, Among Other Violations

The SEC charges Blackstreet Capital Management with several violations, including improperly charging fees and expenses to its funds. Blackstreet passed operating partner oversight fees, political contributions, and entertainment expenses to its funds when they were not expressly authorized to do so. Blackstreet also did not maintain sufficient records to determine whether entertainment expenses were for personal or business use.

To settle the charges, Blackstreet Capital Management paid a penalty of $500,000 and a disgorgement of $2,300,000 plus $280,000 in interest.

SEC Director of Enforcement Highlights Expense Allocation in Keynote Address

Andrew Ceresney, Director of the SEC Division of Enforcement delivers a keynote address to the Securities Enforcement Forum West.

In his speech, Ceresney notes that investors "do not have sufficient transparency into how fees and expenses are charged to portfolio companies or the funds. Sometimes fees are not properly disclosed, conflicts are not aired, expenses are misallocated, and investors are defrauded. Private equity advisers are fiduciaries and need to fully satisfy the duties of a fiduciary in all of their actions".

Ceresney goes on to discuss the misallocation cases of KKR, Lincolnshire, and Cherokee.

IntegriDATA Introduces EAS Expense Allocation System

IntegriDATA announces EAS Expense Allocation System, the industry's first comprehensive expense allocation solution. EAS eliminates the inherent risks of manually allocating expenses using Excel spreadsheets and helps investment managers ensure regulatory compliance.

SEC OCIE Lists Expense Allocation as Examination Priority for 2016

The SEC OCIE releases its annual list of Examination Priorities in which they explicitly state expense allocation as a priority for 2016.

“We will examine private fund advisers, maintaining a focus on fees and expenses”.

SEC Charges Cranshire Capital with Misallocation, Prompting Cranshire to Close

The SEC charges Cranshire Capital with negligently misallocating compliance, legal, and operating costs to its funds without proper disclosure. Again, the partnership agreement stated that funds would pay for their own expense, but it did not authorize Cranshire to pass on the advisor’s legal and compliance expenses.

Again, the lack of policy or procedure around expense allocation was deemed to be a contributing factor.

Cranshire paid a penalty of $250,000 to settle. As a result of the settlement, the firm has withdrawn its SEC registration and plans to close.

SEC Charges Cherokee Advisors with Misallocation

The SEC charges Cherokee Advisors and affiliate Cherokee Investment Partners with misallocating various consulting, legal, and compliance expenses related to its registration as an investment advisor. The limited partnership agreement stated that the funds would be charged for expenses that arose out of their operation, however, there was no disclosure the funds would be responsible for the adviser’s legal and compliance expenses.

The SEC found Cherokee’s lack of policies or procedures to guide the allocation process a contributing factor to its breach of fiduciary duty.

To settle, Cherokee reimbursed its clients $450,000 and paid a penalty of $100,000 to the SEC.

SEC Chair Mary Jo White Delivers Speech Highlighting Expense Allocation as an Area of Concern

At the Managed Fund Association Conference, Chair White delivers the key note address entitled: “Five Years On: Regulation of Private Fund Advisors after Dodd-Frank”.

In her speech, White speaks about the risks within firms and discusses the results of presence exam findings and associated SEC actions:

“Many of these actions center on disclosure and conflicts of interest, including advisors misallocating expenses to funds [and] using funds to pay operating expenses without authorization and disclosure…”

SEC Announces Largest Expense Misallocation Charges to Date Against KKR

The SEC charges Kohlberg Kravis Roberts & Co ("KKR") with misallocating more than $17 million in broken deal expenses to its funds.

This action was the first SEC case to charge a private equity advisor with misallocating broken deal expenses. The SEC found that "KKR’s failure to adopt policies and procedures governing broken deal expense allocation contributed to its breach of fiduciary duty."

KKR agreed to pay more than $17 million in disgorgement as well as $4.5 million in prejudgment interest and a $10 million penalty. In all, KKR paid nearly $30 million dollars to settle the charges.

SEC Announces Charges Against Alpha Titans LLC and Auditor for Improper Expense Allocations

The SEC alleges Alpha Titans “did not make the proper disclosures for clients to decipher that the funds were footing the bill for many of the firm’s operational expenses”. Alpha Titans’ auditor was charged with “improper professional conduct… by not considering the adequacy of the related party disclosures in the funds’ financial statements.”

Alpha Titans agreed to pay a $500,000 disgorgement and $200,000 penalty to settle with the SEC. In addition, Alpha Titan’s principal and general counsel were barred from the securities industry for one year.

Alpha Titans’ auditor paid a $75,000 penalty and was suspended from practicing as an accountant for any SEC regulated entity for three years.

SEC Announces Charges Against Lincolnshire Management for Misallocating Portfolio Company Expenses

The SEC alleges that “despite developing an expense allocation policy”, Lincolnshire Management failed to consistently follow that policy, “resulting in the portfolio company owned by one fund paying more than its fair share of joint expenses”.

Lincolnshire settled with the SEC for $2.3 million.

SEC OCIE Director Warns Private Equity on Expense Allocation Deficiencies

In a landmark speech entitled “Spreading Sunshine in Private Equity”, SEC Director of the OCIE states:

“By far, the most common observation our examiners have made when examining private equity firms has to do with the adviser’s collection of fees and allocation of expenses. When we have examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law or material weaknesses in controls over 50% of the time… This is a remarkable statistic.”

SEC Announces Charges Against Clean Energy Capital LLC in Expense Misallocation Scheme

The SEC alleges Clean Energy Capital (“CEC”) “improperly and without sufficient disclosure, allocated many of its own expenses to their funds… and also failed to adopt compliance policies…”, among other charges.

CEC settles with the SEC for $2.2 million.

SEC Launches Presence Exam Initiative

The SEC announces the OCIE will perform examinations of newly registered Private Advisors to establish a presence in the industry and evaluate the industry’s compliance with the SEC’s regulatory standards.

SEC Warns Private Equity on Expense Allocation

In a Q&A at Private Equity International's Private Fund Compliance Forum, SEC Director of the OCIE states:

“As a fiduciary, it is important that private equity advisers allocate their fees and expenses fairly. A firm should clearly disclose to clients the fees that it is earning in connection with managing investments as well as expense allocations between a firm and its client fund. Advisers should ensure the timeliness, accuracy and completeness of such reporting. A firm’s disclosure policies and procedures should address the allocation of their fees and expenses. In cases where two funds managed by the same investment adviser co-invest in the same investment vehicle, expenses should be allocated fairly across both funds.”

SEC Warns Hedge Funds on Expense Allocation

In a speech entitled “What SEC Registration Means for Hedge Fund Advisors”, SEC Deputy Director of the Office of Compliance Inspections and Examinations ("OCIE") states:

“As a fiduciary, it is important that hedge fund advisers allocate their fees and expenses fairly. A firm should clearly disclose to clients the fees that it is earning in connection with managing investments as well as expense allocations between a firm and its client funds. Advisers should ensure the timeliness, accuracy and completeness of such reporting. A firm’s disclosure policies and procedures should address the allocation of their fees and expenses.”

Dodd-Frank Wall Street Reform Act

In response to the financial crisis of 2008, Congress passes the Dodd-Frank Act bringing about sweeping change across the investment industry.

Section 403 of Dodd-Frank repeals the 1940 Act Private Advisor exemption and, for the first time, Private Advisors are required to register with the SEC.

Section 913 empowers the SEC to conduct exams of investment advisors to evaluate the effectiveness of regulatory standards and identify gaps.

Great Recession

The housing bubble bursts causing securities to tumble, leading to a systemic crisis and the demise of Bear Sterns and Lehman Brothers. The crisis sparks the Great Recession, the worst economic downturn since the Great Depression in 1929.

SEC Adopts Rule 206(4)-7 Under Avisors Act

The new rule requires "each investment company and investment adviser registered with the Commission to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws, review those policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a chief compliance officer to be responsible for administering the policies and procedures."

Private Advisors continue to be exempt.

Investment Advisors Act of 1940

Congress passes the Investment Advisor Act which requires Investment Advisors to register with the SEC.

Private Advisers are exempted from complying with the Act under Section 203(b)(3).

Securities Exchange Act of 1934

Congress passes the Securities Exchange Act of 1934 which creates the Securities and Exchange Commission ("SEC") to enforce the nation's securities laws.

Great Depression

A dramatic stock market crash sets off a global economic depression.