Here is a new one. The SEC announced the settlement of charges it brought against registered investment advisers Hudson Advisors L.P. and Lone Star Global Acquisitions Ltd. for including Hudson’s owner’s anticipated income tax liability as a component of certain fees charged to 14 private equity funds they managed. Yes, they included the owners personal tax liability as a fee to their fund clients.
That ultimately caused a payment of $11.2 million in civil penalties and reimbursements of $68.5 million to the affected funds.
The SEC Charges
According to the SEC’s order, between at least 2005 and 2017, Hudson Advisors included $54.6 million of its owner’s anticipated U.S. tax liability in fees charged to the funds. By law, these tax liabilities were payable by the owner rather than by Hudson. The SEC’s order finds that Hudson and Lone Star Global never disclosed the inclusion of these tax liabilities to their clients. The order also finds that Hudson and Lone Star Global were not authorized to charge this fee component without full and fair disclosure to the funds. Lastly, the order finds that Hudson and Lone Star Global failed to implement appropriate policies and procedures in connection with conflicts of interest and disclosure of fees charged to advisory clients.
“As fiduciaries, investment advisers must provide full and fair disclosure of their fees and charges to clients,” said David Peavler, Director of the SEC’s Fort Worth Regional Office. “According to the SEC’s order, Hudson and Lone Star Global failed this duty for 13 years, and today’s action confirms that the Commission will hold firms accountable for such failures.”
The Settlement
Without admitting or denying the SEC’s findings, Hudson and Lone Star Global agreed to a cease-and-desist order finding that they violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 204(6)-7 and 206(4)-8 thereunder, and ordering them to pay the $11.2 million penalty.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.
