SEC Charges Private Fund Adviser for Failing to Reduce Management Fees as a Result of Write Downs
Oct. 22, 2020
File No. 3-20133
October 22, 2020 - The Securities and Exchange Commission today announced settled charges against EDG Management Company, LLC, a Virginia-based investment adviser, concerning management fees EDG charged to a private equity fund it advises.
According to the SEC's order, the Limited Partnership Agreement (LPA) for the private fund EDG advises allows EDG to charge the fund, on a quarterly basis, a management fee based on total invested capital contributions. As described in the order, the LPA provides that the fee is calculated using an amount that should be reduced if certain triggering events occur, including write downs of portfolio securities. The order finds that, during the period from January 1, 2016 through October 1, 2019, certain portfolio securities were subject to write downs under the terms of the fund's LPA. However, as stated in the order, EDG did not adjust thirteen quarterly management fee calculations to account for these write downs, causing the fund and, ultimately, its limited partners to pay approximately $900,000 more in management fees than they should have paid.
The order charges EDG with violating Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Without admitting or denying the SEC's findings, EDG agreed to a cease-and-desist order, to be censured, to pay disgorgement and prejudgment interest totaling $1,026,642, and to pay a $175,000 civil penalty. EDG also agreed to distribute over $1 million to harmed limited partners.
The SEC's investigation was conducted by Oreste McClung and supervised by Brendan McGlynn, both of the Asset Management Unit in the Philadelphia Regional Office. The investigation was prompted by an examination by Tamara Young, Richard Stewart, Daniel Faigus, Michael Makoul, Steven Dittert, and Brian Carroll of the Philadelphia Regional Office.