Lightyear Capital has settled with the Securities and Exchange Commission for $400,000 over claims the private equity firm overcharged investors.
The agency imposed the civil penalty on Lightyear, which neither admitted nor denied the findings, in violation of the Investment Advisers Act of 1940 for fraudulent behavior.
Lightyear, a Delaware-incorporated partnership with $2.27 billion in assets under management as of the end of 2017, has been managing its Flagship and Employee Funds since 2000. But over a 16-year period through 2016, the Flagship Funds incurred expenses totaling $167,000 that should have been paid by its Employee Funds, the SEC found. At the same time, the firm allowed co-investors to invest in portfolio companies, but their expenses — amounting to $221,000 — were covered by the Flagship Funds as well.
The SEC also discovered that between 2010 and 2015, about $1 million from two of Lightyear’s portfolio companies was paid to co-investors.
“The co-investors provided no services to the Portfolio Companies for these fees,” the SEC order reads. “Sharing advisory fees with co-investors reduced the management fee offset and thus increased the management fees paid by the Flagship Funds.”
The settlement was the result of an examination that started in December 2016 by the SEC’s Office of Compliance Inspections and Examinations, which looked into Lightyear’s expense allocation and fee-sharing practices.
Lightyear’s settlement shows the SEC is not taking its examinations lightly. Lightyear’s compliance team should have caught the misallocation of expenses and taken appropriate measures to correct it, according to Cipperman Compliance Services, which outsources chief compliance officers.
The service provider said in a note that Lightyear could have avoided the public enforcement action and the resulting fine if the firm had implemented “a reasonable” compliance program.
“C-suite executives should re-think the cowboy mentality that ignores compliance until the SEC or a client makes them change,” Cipperman added. “It’s much less expensive to change the oil every 5,000 miles than to replace the engine if it seizes.”