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Lightyear Fined for Expense Allocation, Fee-Sharing Practices

The private equity firm will pay a $400,000 fine to the SEC.

Lightyear Capital, a private equity firm that specializes in financial services, has settled with the Securities and Exchange Commission over allegations related to its expense allocation and fee-sharing practices. Without admitting or denying the findings, the firm has agreed to pay a $400,000 fine.

Lightyear is a familiar name in wealth management due to its investments in financial advisory firms, including independent broker/dealer network Advisor Group and registered investment advisors Wealth Enhancement Group and HPM Partners. It’s also the previous owner of Cetera Financial Group, which Lightyear sold to RCS Capital in 2014. RCAP has since gone bankrupt, causing Cetera to emerge as a private company. This summer, Genstar Capital acquired a majority stake in the company.

The firm manages four flagship private equity funds, as well as three Employee FundsEmployee Funds, which invest alongside those funds. According to the SEC, the firm allocated certain expenses, including broken deal, legal, consulting, insurance and other expenses, to the Flagship Funds, while the firm didn’t allocate a proportional share to the Employee Funds. The firm should have disclosed the conflict to investors, the SEC claims. As a result, shareholders in the Flagship Funds paid $167,000 more in expenses from 2000 to 2016.

“The failure to allocate such expenses to the Employee Funds and the allocation of those expenses to the Flagship Funds benefited Lightyear’s Employee Funds at the expense of the Flagship Funds,” the claim says.

A Lightyear spokesman declined to comment.

The SEC also found that co-investors were not expensed properly, and, again, Lightyear failed to disclose that to the Flagship Funds investors. That resulted in investors paying an additional $221,000 more in expenses over the 16-year period.

The regulator also found fault in Lightyear’s fee-sharing practices. The firm had arrangements in place where it received fees for providing advisory services to its portfolio companies; those fees were supposed to offset management fees paid by the Flagship Funds, according to its disclosures. But, between 2010 and 2015, $1 million of those fees went to co-investors, increasing the management fees paid by the Flagship Funds.

“While the Flagship Fund LPAs permitted the general partner of the Flagship Funds to negotiate different investment terms for co-investors, Lightyear did not disclose either the fee-sharing agreements or the payments in the Organizational Documents or elsewhere,” the claims says. “Lightyear’s failure to disclose these agreements and failure to provide the Flagship Funds with the relevant management fee offsets benefited the co-investors at the expense of the Flagship Funds.”

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