The SEC has sued a fund-of-funds manager for deducting ordinary operating expenses as organizational expense reimbursement and for investing in a fund controlled by the sponsor.  Although the fund’s offering document stated that the fund would be responsible for paying organizational expenses, the defendant allegedly deducted adviser operating expenses, even thought the Investment Advisory Agreement specifically made the adviser responsible for such expenses.  The defendant also invested more than 15% of the fund’s assets in a fund controlled by the adviser, contrary to statements made in the PPM.

OUR TAKE: Private funds rarely detail in the PPM expenses included in “organizational expenses.”  Sponsors should take a conservative approach to classifying such expenses.