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SEC fines WL Ross for miscalculation of transaction-fee sharing

  • WL Ross to pay $2.3 mln civil penalty
  • Already reimbursed investors $11.8 mln
  • Firm has strengthened internal controls

Even though WL Ross & Co self-reported a potential disclosure issue about how it shares transaction fees, and it reimbursed limited partners, the U.S. government still took its share from the distressed-investment firm.

On Wednesday, the Securities and Exchange Commission announced a settlement with WL Ross in which the firm will pay a civil penalty of $2.3 million. The move comes after the firm reimbursed LPs $11.8 million in management fees and interest.

WL Ross did not admit or deny the findings. PE HUB previously reported on the reimbursement.

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

WL Ross, which is owned by Invesco, reported the issue to the SEC after the agency began a compliance exam in 2014, the SEC said in its order.

Like most firms, WL Ross takes transaction fees from portfolio companies and shares a percentage of those fees with LPs to reduce management fees. Limited-partner agreements were “ambiguous” on transaction-fee sharing when multiple WLR funds and co-investors invested in the same company, the SEC said.

Between 2001 and 2011, WL Ross used an allocation methodology that allowed the firm to retain a “significant amount” of transaction fees for itself rather than sharing them out, the SEC said.

The firm allocated transaction fees to LPs based on their relative ownership percentages of portfolio companies, rather than on a pro-rata basis, without disclosing this practice.

WL Ross retained that portion of the transaction fees based on co-investors’ relative ownership of the portfolio companies, without subjecting the fees to offsets. Using this methodology, the firm retained about $10.4 million more in management fees during the period, the SEC said.

WL Ross self-reported its allocation practices to SEC, started to share transaction fees pro-rata across its funds and retroactively applied the new sharing process to recalculate historic management fees and offsets dating back to the inception of the funds. Because of this effort, the firm reimbursed LPs $11.8 million in management fees and interest.

Since the exam, WL Ross has taken other steps to strengthen controls, the SEC said. The firm hired a new chief compliance officer, who participates on all the firm’s key committees. The firm also implemented recommendations from an auditor to enhance the expense review and approval process and the tracking and monitoring of transaction fees, the SEC said.

WL Ross was formed in 2000 out of Rothschild Inc’s bankruptcy and turnaround group. Invesco acquired the firm in 2006.

It raised its most recent fund, WLR Recovery Fund V LP, in 2012. Fund V closed on $2.2 billion, made up of $640 million from external investors and the balance in separate accounts and committed co-investments.

Action Item: Read the SEC’s settlement order with WL Ross: https://www.sec.gov/litigation/admin/2016/ia-4494.pdf

An exterior view of SEC headquarters in Washington on June 24, 2011. Photo courtesy Reuters/Jonathan Ernst