Security - Check Permissions

MFDF - Mutual Fund Directors Forum - SEC Fines Adviser, Board for 15(c) Violations

Member Login



Request an account

Sample Banner 1

SEC Fines Adviser, Board for 15(c) Violations

The SEC announced yesterday that it had settled charges against an investment adviser and board for faults in the 15(c) process. The SEC alleges that the board of the World Funds Trust requested certain information from the funds’ adviser, Commonwealth Capital Management (CCM), in connection with its 2008 15(c) process. However, no documentation exists to show that the adviser provided the information or that the board reviewed such information or followed up on the requests. According to the order, the board nonetheless approved the funds’ advisory fees, finding that the proposed fees were “within an appropriate range.”  The SEC also alleges that the adviser provided incomplete information regarding the nature and quality of services it provided to the WFT funds compared to services provided by the sub-adviser and administrator and that the board again did not request additional materials. As a result, the SEC charges that board did not have all of the information that it needed to evaluate the contracts that it approved. The order notes that the WFT board was advised by independent counsel during the process.  The order states that CCM and the directors “willfully violated Section 15(c)” because the directors approved CCM’s initial advisory contracts “without having all the information they requested as reasonably necessary for their evaluation”   

In the announcement, Co-Chief of the SEC Enforcement Division’s Asset Management Unit Julie Riewe emphasized that “[t]he advisory fee typically is the largest expense reducing investor returns.” However, the order notes that the funds did not pay an advisory fee due to a fee waiver in effect and that the adviser reimbursed the “vast majority” of the funds’ operating expenses during the relevant period. Additionally, each of the WFT trustees received no compensation for their service on the board. While acknowledging these facts, the order notes that “the Trustees were obligated to evaluate [the adviser’s] services as compared to the fees provided for in the advisory contracts.” Riewe suggested that the board “fell short as the shareholders’ watchdog by essentially rubber-stamping the adviser’s contract and related fee.”

The SEC also alleges that CCM omitted or provided inaccurate information regarding the 2009 15(c) process for a series of funds within World Funds, Inc. (WFI) related to fee comparisons, profitability, breakpoints, and an expense limitation agreement. The WFI board was also represented by independent counsel. However, the SEC did not charge the trustees of the WFI funds. The board of the WFI Funds did receive comparative fee information. However, the SEC found that materials provided to the board included comparisons to funds with different distribution fee levels, different types of funds, and funds with different fee structures. According to the order, the board requested information about the adviser’s profitability, including two years of financial statements and the adviser’s allocation methodology. However, the SEC found that CCM provided only an income statement for one year and did not provide a written description of its allocation methodology.  The SEC further found that an affiliated administrator of the adviser failed to include required 15(c) information in a fund’s shareholder report as required.

To settle the charges, the adviser, the administrator, and the majority owner agreed to jointly and severally pay a $50,000 fine. Additionally, each of the trustees of the WFT funds agreed to pay $3,250.