- SEC Charge Hedge Fund Advisory Firm with Improper Expense Allocations and Violation of the Custody Rule
- May 1, 2015
- Law Firm: Sutherland Asbill Brennan LLP - Washington Office
The Securities and Exchange Commission recently announced the settlement of charges against a Santa Barbara, California based hedge fund advisory firm and two executives involved in improper utilization of fund assets to pay undisclosed operating expenses.
According to the SEC’s order instituting settled administrative proceedings, the hedge fund adviser used fund assets to pay for adviser-related operating expenses without clear authorization under the fund’s operating documents to do so. In addition, the fund’s financial statements failed to accurately and completely disclose that the fund’s assets were being used to pay for the advisory’s firm operating expenses. Because the fund’s financial statements did not reflect certain related-party relationships and material transactions, they were not presented in accordance with Generally Accepted Accounting Principles (“GAAP”). As a result, the SEC contended that the advisory firm violated Rule 206(4)-2 under the Investment Advisers Act of 1940, on custody, by distributing financial statements that were not GAAP compliant. The principal and general counsel of the hedge fund adviser, along with the adviser’s outside auditor, settled the SEC’s charges without admitting or denying its findings.