The Securities and Exchange Commission has charged two registered investment advisers, Hudson Advisors L.P. and Lone Star Global Acquisitions Ltd., for including Hudson’s owner’s anticipated income tax liability as a component of certain fees charged to 14 private equity funds they managed.
Hudson and Lone Star Global have agreed to pay $11.2 million in civil penalties and have reimbursed the affected funds $68.5 million, which includes interest on the undisclosed tax liability charges.
According to the SEC, between at least 2005 and 2017, Hudson included $54.6 million of its owner’s anticipated U.S. tax liability in fees charged to the funds. By law, these tax liabilities were supposed to paid by the owner rather than by Hudson.
The SEC claims that Hudson and Lone Star Global never disclosed these tax liabilities to their clients. In addition, they were not authorized to charge this fee component without full and fair disclosure to the funds. Lastly, the SEC found that they failed to implement appropriate policies and procedures in connection with conflicts of interest and disclosure of fees charged to advisory clients.
“As fiduciaries, investment advisers must provide full and fair disclosure of their fees and charges to clients,” said David Peavler, director of the SEC’s Fort Worth regional office. “According to the SEC’s order, Hudson and Lone Star Global failed this duty for 13 years, and today’s action confirms that the Commission will hold firms accountable for such failures.”
Without admitting or denying the SEC’s findings, Hudson and Lone Star Global agreed to cease-and-desist and were ordered to pay the $11.2 million penalty.