Most private fund documents allow the manager to charge the funds for expenses incurred in the operation of the funds. Most investors expect and most managers charge the funds for some of the legal expenses and consulting expenses. The Securities and Exchange Commission though Cherokee went too far in charging the funds for expenses related to registration with the SEC.
Like many private fund managers, Cherokee spent a great deal of time, money and energy in 2011 in preparing to register with the SEC as an investment adviser. According to the SEC order, Cherokee charged $171,000 of those expenses to the funds it managed. The expenses were for a third-party consultant and outside counsel, as well as registration fees.
Cherokee was subject to an exam in 2013 and incurred $239,362 of expenses that it charged back to the funds. In 2014, Cherokee got notice of an impending enforcement action and charged $45,000 to the funds for legal services incurred during the investigation.
The SEC takes the position in the enforcement action that the disclosure would need to specifically state that funds would be charged for a portion of the adviser’s own legal and compliance expenses. Cherokee’s partnership provided that the funds would be charged for expenses that in the good faith judgment of the general partner arose out of the operation and activities of the funds. That was not good enough for the SEC.
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