WL Ross ponies up $14.1m from fee disclosure issues

A $2.3m penalty enforced by the SEC this week follows some $11.8m in management fees and interest that the firm has already returned to investors.

Distressed-focused private equity firm WL Ross & Co has agreed to pay a $2.3 million civil penalty issued by the Securities and Exchange Commission, the SEC announced in a statement this week.

The regulator charged WL Ross for allegedly failing to properly disclose the method used to allocate certain fees it charges investors.

WL Ross voluntarily revised its fee allocation methodology after bringing it to the attention of the SEC as part of an examination conducted by the regulator in 2014. The firm then applied this revised methodology retroactively to calculate how much it would return to investors, and voluntarily reimbursed approximately $11.8 million in management fees and interest to the funds involved.

WL Ross had initially agreed with its investors to reduce its quarterly management fees by between 50 percent and 80 percent of any transaction fee it had collected the previous quarter, the SEC said. The transaction fees were payments from portfolio companies for advisory and other services WL Ross provided. But the limited partner agreements did not specify exactly how the transaction fees would be allocated when there were several WL Ross funds and co-investors who had investments in the same portfolio company.

Between 2001 and 2011, WL Ross used a transaction fee allocation methodology that enabled it to keep a “significant” part of the transaction fees for itself, the SEC said.

“Specifically, WL Ross allocated transaction fees to the…funds based upon their relative ownership percentages of the portfolio company – rather than on a pro-rata basis – without disclosing this practice,” the SEC said.

The methodology used meant that WL Ross could keep for itself the portion of the transaction fees allocated to it that was based on co-investors’ relative ownership of the portfolio company. Since the fees it kept were not used to calculate management fee offsets, WL Ross received about $10.4 million more in management fees than it otherwise would have between 2001 and 2011.

Investors in these funds were not told of the fee calculation methodology, the SEC said: “WLR did not disclose to the WLR funds and to the funds’ limited partners that it would allocate transaction fees according to the above allocation methodology, and that WLR construed the ambiguous provisions in the relevant LPAs in its own favour rather than the WLR funds’ favour.”

The limited partners in the WLR Funds include pension funds, such as the California Public Employees Retirement System, university endowments, including The University of Virginia Investment Management Company and other large institutional investors and high net worth individuals.

“We are pleased to have arrived at a resolution around historical management fee disclosure in a subset of our funds. This resolution reflects a proactive approach to handling the matter and our commitment to exceeding the expectations of today’s private equity market,” a spokeswoman for WL Ross told pfm.

WL Ross is the second private equity firm to be penalized by the SEC for fees-related offences this week. On Tuesday Apollo Global Management agreed to a $52.7 million settlement with the SEC for alleged undisclosed fee acceleration and failure to supervise a senior partner who charged personal expenses to several funds.

New York-headquartered WL Ross is owned by billionaire investor Wilbur Ross and was acquired by independent investment management company Invesco in 2006. WL Ross invests in financially distressed companies and provides investment advisory services to the WLR Funds and other private equity funds, as well as to separately managed accounts and co-investment vehicles. As of April 21 the firm has approximately $4.6 billion in assets under management.