The U.S. Securities and Exchange Commission (SEC) imposed sanctions on Catalyst Capital Advisors LLC, a registered investment advisory firm based in San Juan, Puerto Rico, for its involvement in an unauthorized legal fee sharing arrangement. According to the settlement agreement, the company must pay a fine. This incident serves as a significant case of violation of legal obligations by investment firms and has issued a warning effect across the entire investment industry.
Illegal Legal Fee Payments by Catalyst Capital Advisors
As an SEC-registered investment company, Catalyst engaged in improper fee payment arrangements with Mutual Fund Series Trust, resulting in the Trust paying excessive legal fees.
Investigation by SEC and Other Regulatory Bodies
In 2017, due to losses of the Hedged Futures Fund, Catalyst and the Trust were subject to an investigation by the SEC. This was followed by class action lawsuits and derivative suits by shareholders.
Hiring of Legal Representatives and Fee Payments
Catalyst hired the same legal advisor without the approval of the Trust's board and had the Trust bear the costs. These expenses were later paid by insurance companies.
Legal Fee Evasion and Subsequent Repayment by Catalyst
According to the order, from May 2017 to March 2020, Catalyst avoided paying legal fees, only beginning to repay the shared expenses to the Trust afterward. Over the years, Catalyst benefited from this improper arrangement by delaying payment of legal fees.
SEC’s Investigation Findings and Sanctions Against Catalyst
According to the SEC’s order, Catalyst violated Section 17(d) of the 1940 Investment Company Act and its Rule 17d-1, as well as Section 206(2) of the 1940 Investment Advisers Act, which include prohibitions on affiliates of registered investment companies engaging in joint transactions and the anti-fraud provisions of the securities laws.
Catalyst neither admitted nor denied these findings, accepted a cease-and-desist order and censure, and was ordered to pay back $280,902. This amount was offset by $183,757 through previous payments, and also included $30,081 in prejudgment interest and a $200,000 civil penalty.
Conclusion
This incident reiterates the importance of legal obligations and ethical responsibilities in the investment advisory industry. The case of Catalyst Capital Advisors provides a lesson to other investment firms to avoid similar violations. Transparency and adherence to regulations are key to protecting investors.
