For investment advisers the key is conflicts. You have to disclose them and property manage them. What is the biggest conflict for an investment adviser?
(The title probably gave it away.) Fees.
This is particularly true for private funds where the investors may not see the actual fee calculation. The basis for the calculation may be complicated to calculate.
I present to you the case of ECP Manager who was the sponsor of a private fund, ECP Africa Fund II PCC. ECP collected management fees from the Fund based on its total invested capital contributions. Under the Fund’s documents, ECP could not take fees for investments that had been written off and had to reduce the fee for investments that have been written down.
In 2010, the Fund obtained warrants on the common stock of an African mining company. The investment didn’t work out and by March 2014, the Fund had valued these warrants at zero. The warrants expired in the next quarter, definitely making them worthless.
Unfortunately for its investors, ECP Manager included $3.41 million of invested capital contributions attributable to those warrants in the three quarters after the warrants expired. Unfortunately for ECP, the SEC discovered the mistake. The SEC estimated the Fund’s investors overpaid $102,304 in management fees to ECP because of the fee calculation mistake.
ECP had to pay make the investors and pay a $75,000 penalty to the SEC.
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