The Securities and Exchange Commission (Commission) reached a settlement with a registered investment adviser (Adviser) for making material misrepresentations regarding the expenses paid by four money market funds (Funds) that the Adviser managed, in connection with fund reimbursement of fees and expenses that the Adviser had waived or reimbursed during the period from January 2016 through February 2019.1
The Adviser had contractual expense limitation agreements with the Funds under which the Adviser agreed to waive fees and/or reimburse fund expenses to ensure each Fund’s total operating expenses did not exceed a certain percentage of the Fund’s average net assets (expense cap). The Adviser also had voluntary expense limitation agreements with the Funds under which the Adviser agreed to waive a portion of its fees and/or reimburse some fund expenses to prevent the Funds from experiencing a negative yield. Under these voluntary expense limitation agreements, the Adviser was entitled to recapture any such waived fees or reimbursed expenses during the following three years, provided the recaptured amounts did not result in negative yields for the Funds.
The Adviser recaptured from the Funds amounts that it had previously waived or reimbursed under the voluntary expense limitation agreements, but the Funds, in some cases, exceeded their contractual expense caps as a result of the recaptured amounts. This caused investors in those Funds to collectively incur over $5.2 million in additional fund expenses.
Furthermore, the Adviser prepared the Funds’ prospectuses but omitted the expenses associated with the amounts that the Adviser recaptured under the voluntary expense limitation agreements from the “Other Expenses” line item in the prospectus fee tables.2 As a result of this omission, the fee tables, in some cases, failed to inform investors that the Funds exceeded their disclosed expense caps for the Funds’ most recent fiscal year.
In addition, the Adviser’s written policies and procedures stated that recaptured expenses were to be included within the “Other Expenses” line item in the prospectus fee tables, but the Adviser failed to implement these policies and procedures with respect to the Adviser’s recapture of amounts previously waived or reimbursed under the voluntary expense limitation agreements.
As a result of the Adviser’s material misstatements and omissions concerning the impact of the recaptured amounts on the Funds’ annual operating expenses, and the Adviser’s failure to implement its policies and procedures relating to the recapture of amounts previously waived or reimbursed, the Commission’s order (Order) found that the Adviser violated Section 206(4) of the Investment Advisers Act of 1940 (IAA) and Rules 206(4)-7 and 206(4)-8 thereunder and Section 34(b) of the Investment Company Act of 1940 (ICA).3
Without admitting or denying the findings in the Order, the Adviser agreed to a cease-and-desist order, a censure, and to pay disgorgement and prejudgment interest of approximately $5.9 million to be disbursed to affected investors in the Funds. The Order noted that the Commission did not impose a civil penalty, based on the Adviser’s voluntary self-reporting of its conduct and subsequent cooperation in the matter. The Adviser, among other actions, took prompt steps to remediate the violations.
S&K Observations
The Order illustrates the potential for compliance errors when funds have multiple expense limitation agreements. Here, the Adviser needed to ensure that the recapture of any waived fees or reimbursed expenses under the voluntary expense limitation agreements would not cause the Funds to exceed the contractual expense limitations for the Funds.
Furthermore, in not imposing a civil penalty on the Adviser, the Order reflects the Commission’s willingness to credit a firm’s cooperation in an investigation or enforcement action under certain circumstances.
