Adviser, Founder Sanctioned for Conflicts, Misdescribed Fees
Investment advisers have long been one of the key targets of SEC enforcement. The number of cases brought each year naming advisers and/or their firms as either a defendant or respondent is typically one of the largest groups of cases filed each year. Two of the claims typically asserted in those cases involve fees and undisclosed conflicts of interest. Despite the steady stream of cases advisers continue to have difficulties in these areas. The agency’s latest case involving an advisory is based on both issues – fees and conflicts. In the Matter of Alumni Ventures Group, LLC, Adm. Proc. File No. 3-20791 (March 4, 2022).
Alumni Ventures Group has been an exempt reporting adviser since December 18, 2017. The firm relies on an exemption from registration for venture capital fund advisers in Section 203(f) of the Advisers Act. It has about $425 million under management. Respondent Michael Collins is its founder.
The Order Instituting Proceedings is based on two claims. The first centers on the fees charged clients. Over a four-year period, beginning in June 2016, the adviser told clients and others that its management fee for the venture capital funds it managed was the “industry standard ‘2 and 20.’” In fact, it was not. The industry standard was to assess 2% each year and carried interest of up to 20%. In contrast, the firm here charged 2% each year plus the full 20% – not the industry standard.
Second, the firm made inter-fund loans and cash transfers between funds as well as loans to certain funds. Those transactions violated the funds’ operating agreements prohibiting commingling and its fiduciary duties to the funds. The interfund transfers also were a conflict of interest between the funds that was not disclosed. The Order alleges violations of Section 206(2) and 206(4) of the Advisers Act. The firm undertook certain remedial acts and agreed to implement certain undertakings.
To resolve the proceedings Respondents consented to the entry of cease-and-desist orders based on the Sections cited in the Order and to a censure. Respondents will each pay a penalty of $700,000 and, in addition, Mr. Collins will pay an additional penalty of $100,000.