Press Release SEC Charges Private Equity Fund Adviser for Overcharging Fees and Failing To Disclose Fee Calculation Conflict
The Securities and Exchange Commission today charged New York-based investment adviser Insight Venture Management LLC with charging excess management fees and failing to disclose a conflict of interest to investors relating to its fee calculations. To settle the SEC’s charges, Insight agreed to pay a $1.5 million penalty and $864,958 in disgorgement and prejudgment interest, which has already been paid back to the impacted funds.
According to the SEC’s order, Insight’s limited partnership agreements for certain funds it advised allowed it to charge management fees based on the funds’ invested capital in individual portfolio investments and required Insight to reduce the basis for these fees if Insight determined that one of these portfolio investments had suffered a permanent impairment. The order finds that, from August 2017 through April 2021, Insight charged excess management fees by inaccurately calculating management fees based on aggregated invested capital at the portfolio company level instead of at the individual portfolio investment security level, as required by the applicable limited partnership agreements. Further, the SEC’s order finds that Insight failed to disclose to investors a conflict of interest in connection with its permanent impairment criteria. Because Insight did not disclose its permanent impairment criteria, investors were unaware that the criteria Insight used were narrow and subjective, making them difficult to satisfy. Therefore, the order finds that Insight’s investors were unaware that Insight’s permanent impairment criteria granted Insight significant latitude to determine whether an asset would be considered permanently impaired so as to reduce the basis used to calculate Insight’s management fees.
“Investment advisers must accurately calculate their fees in accordance with the fund documents,” said Andrew Dean, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Moreover, when advisers employ fee calculation policies that create conflicts of interest, including permanent impairment policies, they must disclose those conflicts just like all other material conflicts.”
Insight consented to the entry of the SEC’s order finding that the firm violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-7 and 206(4)-8 thereunder. Without admitting or denying the SEC’s findings, Insight agreed to a cease-and-desist order and censure and to pay the previously mentioned penalty, disgorgement, and prejudgment interest. The SEC’s order deems the disgorgement and prejudgment interest satisfied by Insight’s payment back to the impacted funds last month.
The SEC’s investigation was conducted by Heather L. Shaffer of the Asset Management Unit in New York and Daniel Faigus of the Division of Examinations’ Private Funds Unit. It was supervised by Lee A. Greenwood, Mr. Dean, and Corey Schuster of the Asset Management Unit. The examination that led to the investigation was conducted by members of the Division of Examinations Private Funds Unit, including Mr. Faigus, Jennifer Duggins, Adrian Baclit, and Matthew Harris.