Management Fees

SEC Enforcement Case Highlights Pitfalls Of Private Fund Advisory Fees

July 13, 2023 | Katherine Oberlies

On June 20, 2023, the U.S. Securities and Exchange Commission (“SEC”) issued an order against Insight Venture Management LLC (“Insight”). The SEC and Insight settled the matter to resolve allegations that the adviser charged excessive management fees caused by the adviser’s inaccurate application of its “permanent impairment” policy and that the adviser failed to disclose a conflict of interest related to these fee calculations.

Insight is an adviser that advises private equity funds. Limited partnership agreements (“agreements”) associated with some of these private equity funds stated that Insight charged management fees during the funds’ post-commitment period—the period during which a fund manager manages and looks to exit funds’ investments—based on the investor’s pro rata share of the funds’ invested capital. The agreements further stated that if Insight determined an investment suffered a “permanent impairment” in value, the adviser would remove an amount equal to the difference between the acquisition cost and the impaired value of the investment. This amount would be paid from the funds’ invested capital, which would in turn reduce the basis used to calculate fees paid by the fund to Insight. The agreements allotted Insight discretion to reverse the “permanent impairment” determination if the investment increased in value thereafter.
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SEC Settles Charges with Investment Adviser Over Insufficient Disclosure of Fees

September 6, 2017 | Elizabeth Dalziel

On August 14, 2017, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Administrative and Cease and Desist Proceedings (“Order”) against Coachman Energy Partners, LLC (“Coachman”), an investment adviser, and its owner, Randall D. Kenworthy (“Kenworthy”). According to the SEC’s Order, Coachman “failed to adequately disclose its methodology for calculating the management fees and management-related expenses it charged” to four oil and gas funds it managed. Coachman and Kenworthy submitted offers of settlement in conjunction with the Order.

The SEC found that from 2011 to 2014, Coachman acted as investment adviser to four funds specializing in oil and gas operations. Each fund was charged an annual management fee which made up 2 to 2.5% of the total capital contributions given to each fund as of the last day of the year. According to the SEC, however, Coachman’s offering materials and Forms ADV did not adequately disclose that the management fees were based upon year-end contributions. Rather, these documents implied that management fees and expenses were based upon “the average amount of capital contributions under management during the course of the year.” Therefore, the SEC alleged that Coachman and Kenworthy overbilled investors in the amount of $1,128,916.

The SEC also alleged that between 2013 and 2014, Coachman billed two of the funds management expenses based upon 1.5% of the total capital contributions given to these funds as of the last day of the year. However, the offering materials for these funds allegedly did not sufficiently inform investors that the funds would be obligated to pay Coachman for management expenses based on year-end capital contributions. Rather, these materials supposedly informed investors that management expenses were calculated using the average number of capital contributions under management for the whole year. The SEC alleges that this resulted in Coachman and Kenworthy overbilled clients in the amount of $449,294.

SEC Charges Investment Adviser With Defrauding Clients Regarding Advisory Fees

August 29, 2017 | Elizabeth Dalziel

On August 22, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint in the United States District Court for the Central District of California against Jeremy Drake (“Drake”), an investment adviser. The complaint alleges that Drake lied to two clients, a high-profile professional athlete and his wife, regarding their annual management fees. The complaint also alleges that Drake used extensive measures to back up his deception, including sending “false and misleading emails” and “a number of fabricated documents.”

According to the SEC’s complaint, Drake’s alleged misconduct occurred when he was an investment adviser representative of HCR Wealth Advisers (“HCR”), a Los Angeles-based registered investment adviser. In September 2009, the clients entered into an “Investment Advisory Agreement” with HCR. The agreement, which was signed by Drake on behalf of HCR, provided that the clients would pay an annual management fee of 1% of the clients’ assets under management. Evidence shows that the clients paid a 1% management fee for the entire period when they were clients of HCR. Continue reading ›