RIA Compliance Blog
In August of this year, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Cease-and-Desist Proceedings (“Order”) against Capital Dynamics, Inc. (“CDI”), a New York-based investment adviser. The SEC alleged that from March 2011 to July 2015, CDI allocated certain expenses to private funds it was advising when the funds’ governing documents did not authorize the funds to pay these expenses. CDI submitted an Offer of Settlement in conjunction with the Order.
According to the SEC’s complaint, CDI and its affiliates formed the private funds, collectively known as the “Solar Fund,” “to introduce a new investment program focused on clean energy and infrastructure.” The documents that governed the funds provided that CDI and the funds’ general partners were obligated to pay “normal operating expenses,” such as employee expenditures and fees for specified services. They could not charge these expenses to the funds.
The SEC, however, found that CDI had the funds pay expenses that were not authorized in the governing documents. For instance, from June 2012 to November 2013, CDI and some of its employees garnered legal fees relating to negotiations involving the funds’ governing documents. From March 2011 to April 2015, CDI garnered employee expenses and consultant costs that, according to the governing documents, could not be paid from the funds. However, evidence showed that CDI used the funds’ assets to pay these expenses.
The SEC also alleged that CDI did not implement written policies and procedures that were sufficiently tailored to deter violations of the Investment Advisers Act of 1940 (“Advisers Act”) relating to the unauthorized allocation of expenses. Evidence showed that CDI published an internal document called the “Solar Fund Bible.” According to the SEC, the Solar Fund Bible provided inadequate guidelines regarding “the approval of expenses and provided for little to no review of approved invoices.” Moreover, the Solar Fund Bible did not provide a method that CDI could use to greenlight expenses that its personnel imposed on the funds.
CDI agreed to pay the SEC a $275,000 civil money penalty. In calculating this penalty, the SEC took into consideration various remedial measures that CDI took. For example, CDI appointed a new chief compliance officer who instigated a compliance initiative to examine CDI’s policies for greenlighting and evaluating expenses. Evidence also showed that CDI drafted new policies and procedures to replace the Solar Fund Bible. Finally, CDI reimbursed the funds for all unauthorized expenses that it charged.
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