WL Ross & Co., the private equity subsidiary of Invesco, agreed to pay a civil penalty to the Securities and Exchange Commission of $2.3 million to settle charges that the firm failed to disclose its fee allocation practices to limited partners, according to the cease and desist order settling the matter released Thursday.
The SEC had charged WL Ross with allocating fees between the firm and its private equity funds in a way that gave most of the transaction fees to the firm. Specifically, WL Ross’ fee allocation methodology resulted in the funds paying WL Ross approximately $10.4 million in additional management fees between 2001 and 2011, the order stated.
The funds involved were WLR Recovery Fund, WLR Recovery Fund II, Invesco Mortgage Recovery Feeder Fund, WLR IV PPIP Co-Invest and WLR Whole Loan Fund.
Under its limited partnership agreements, WL Ross could receive transaction fees for services the firm provides to portfolio companies. These transaction fees included break-up, origination, commitment, broken deal, topped bid, cancellation, monitoring, closing, financial advisory, investment banking, director or other transaction fees.
Every quarter, WL Ross was supposed to reduce the management fees it received from its funds by 50% or 80% of the transaction fees, depending on the fund. Instead, WL Ross retained a significant amount of these transaction fees rather than allocating them to its funds to offset the firm’s share of management fees, the order stated.
The SEC began its investigation in 2014 and as a result WL Ross conducted an internal review. The private equity manager then voluntarily reimbursed the funds about $10.4 million in management fees and $1.4 million in interest.
“We are pleased to have arrived at a resolution around historical management fee disclosure in a subset of our funds,” said a written statement by the firm provided to Pensions & Investments. “This resolution reflects a proactive approach to handling the matter and our commitment to exceeding the expectations of today’s private equity market.”