The Securities and Exchange Commission (SEC) announced settled charges against San Juan, Puerto Rico-based registered investment adviser Catalyst Capital Advisors LLC for entering into an impermissible joint legal fee arrangement with its client, Mutual Fund Series Trust, an SEC-registered open-ended – investment company fee, which resulted in the fund temporarily paying a disproportionately high amount of commission.
The SEC order finds that Catalyst improperly arranged for the Trust to pay, at least initially, legal fees and costs associated with regulatory investigations and private litigation following significant losses in the Catalyst Hedged Futures Strategy Fund, a series of the Trust.
As set out in the order, Catalyst and the Trust began receiving inquiries from the SEC and another regulator in February 2017 about the Hedged Futures Fund’s losses, followed by a class action in April 2017 and a shareholder derivative action in August 2017.
The order also finds that Catalyst and the Trust retained the same legal counsel to represent them in these matters and, without the approval or knowledge of the Trust’s independent trustees, Catalyst arranged to pay the Trust’s legal fees and expenses and then submit those bills to the Trust’s insurer, including expenses related to Catalyst’s legal representation.
According to the order, Catalyst avoided paying legal fees from May 2017 to March 2020 and did not repay the Trust for its share of the fees until after that time. The order finds that Catalyst benefited from the impermissible cartel by, among other things, delaying payment of its legal bills for many years.
The SEC order finds that Catalyst violated Section 17(d) of the Investment Company Act of 1940 and Rule 17d-1 thereunder, which prohibits joint transactions with affiliates of registered investment companies, and Section 206(2) of the Investment Advisers Act of 1940, an anti-fraud provision of the securities laws.
Without admitting or denying the findings, Catalyst consented to a cease and desist order and reprimand and agreed to pay restitution of $280,902, of which $183,757 is offset by a prior payment to the Trust, prejudgment interest of $30,081 and a civil penalty of $200,000.