SEC Brings Settled Enforcement Action Against Mutual Fund Management Company and Its President for Illegal Performance Fees


Bridgeway Capital Management Agrees to Pay More Than $5 Million in Penalties and Disgorgement; Mutual Fund Shareholders to Be Reimbursed

Washington, D.C., Sept. 15, 2004 -- The U.S. Securities and Exchange Commission today announced that it had instituted settled enforcement proceedings against Bridgeway Capital Management (Bridgeway), and its president, John Noland Ryan Montgomery, in connection with more than $4.4 million in illegal performance-based fees that Bridgeway charged to three of its mutual funds. The settlement requires that Bridgeway reimburse the affected fund shareholders $4,407,700, plus prejudgment interest of $458,764, and that Bridgeway and Montgomery pay penalties of $250,000 and $50,000, respectively.

Headquartered in Houston, Tex., Bridgeway manages 11 no-load mutual funds with combined net assets of approximately $1.4 billion.

In its Order Instituting Proceedings, the Commission found that between July 1995 and March 2004, Bridgeway, at the direction of Montgomery, charged three of its mutual funds more than $4.4 million in illegal performance fees.

Harold F. Degenhardt, Administrator of the Commission's Fort Worth Office, said, "Mutual fund managers must ensure that advisory fees are assessed in strict accordance with the law. This is particularly true with respect to performance-based fees, which must be a fair reflection of a fund's performance during the entire performance period."

Fund managers are required to calculate performance-based fees (fees based on fund performance measured against a benchmark index) using the average value of the fund's assets over the same performance period that is used to measure the fund's performance. According to the Commission's Order, Bridgeway failed to comply with this requirement. Instead of using the average value of its funds' assets over the five-year period Bridgeway used to measure the funds' performance, Bridgeway calculated its performance-based fees using the funds' current asset values. Because the value of the three funds' currentassets typically exceeded the average value of the funds' assets over the five-year performance period, Bridgeway received excess performance fees when it met or exceeded its performance benchmarks — which it consistently did during the relevant period. (Conversely, in the few instances where Bridgeway failed to meet its performance benchmarks, the illegal performance-based fee resulted in lower fees than it would have otherwise earned.)

The three funds and the amount of overcharges are as follows:

FundPeriod Since Inception of Performance FeeNet Overcharge
Aggressive Investors 1July 1, 1995 to March 22, 2004$3,989,346
Aggressive Investors 2January 1, 2003 to March 22, 2004$110,365
Micro-Cap LimitedJuly 1, 1999 to March 22, 2004$307,989

As a result of the conduct described above, the Commission's Order finds that Bridgeway willfully violated, and Montgomery willfully aided and abetted and caused Bridgeway's violation of, Section 205(a) of the Investment Advisers Act of 1940, which prohibits an investment adviser from entering into an advisory contract with a registered investment company that provides for performance-based compensation unless, pursuant to Section 205(b) of the Advisers Act, the contract provides for performance-based compensation based on the asset value of the fund averaged over a specified period and increasing and decreasing proportionately with the investment performance of the fund over a specified period in relation to the investment record of an appropriate index of securities prices. Pursuant to their offers of settlement, Bridgeway and Montgomery neither admitted nor denied the findings in the Commission's Order.

In addition to requiring the payment of disgorgement and penalties, the Commission ordered Bridgeway and Montgomery to cease and desist from committing or causing the above-mentioned securities law violations, and required Bridgeway to comply with certain undertakings, including hiring (or designating) experienced compliance personnel to ensure that Bridgeway applies its performance-based fee in accordance with the federal securities laws in the future.

In accepting Bridgeway's and Montgomery's settlement offers, the Commission took into account their cooperation with the staff's investigation.

For further information contact:

Harold F. Degenhardt 817/900-2607
Spencer C. Barasch 817/978-6425
Stephen Webster 817/978-6459
Timothy McCole 817/978-6453

See Also:  Administrative Proceeding Release No. IA-2294
Last modified: 9/15/2004