Massachusetts Says that Adviser Charged Excessive Fees
The Massachusetts Securities Division filed a complaint against a state-registered adviser in part because the adviser charged excessive fees. The MSD alleges that the adviser’s fee could exceed 15%. According to the MSD (and without citing any authority), the typical advisory fee ranges from 50 basis points to 2% of assets. Citing the SEC Investment Adviser Examinations Manual from 1980, the MSD says that the SEC “considers an annual advisory fee over 200 basis points (2%) rebuttably excessive, and over 300 basis points (3%) excessive to the point of potentially requiring affirmative disclosure to clients that they may obtain the same services elsewhere at lower cost.†The MSD charges several violations of Massachusetts securities fraud statutes.
OUR TAKE: No law specifically regulates the fees that an adviser can charge. Usually, excessive fee cases are framed as violations of fiduciary duty or failures to disclose.. It is disconcerting that Massachusetts is using an SEC examination guide from 1980 as a predicate for state securities law violations. Hedge and private fund managers should be aware that performance fees (during a good year) may raise excessive fee questions under this type of analysis.
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