## Facts

- Lincolnshire Management, Inc. (LMI) was an SEC-registered investment adviser to two private equity funds: Lincolnshire Equity Fund, L.P. (Fund I) and Lincolnshire Equity Fund II, L.P. (Fund II).
- Fund I owned Peripheral Computer Support, Inc. (PCS), acquired in 1997; Fund II owned Computer Technology Solutions Corp. (CTS), acquired in 2001.
- From at least 2005 through 2013, LMI integrated PCS and CTS operationally and managed them as one business, while the entities remained legally separate and maintained separate audited financial statements.
- PCS and CTS used a joint management team and shared operational and administrative costs.
- The companies adopted an expense-allocation policy allocating shared costs based on each company’s revenue as a proportion of combined revenues.
- In certain instances, the allocation policy was not followed, resulting in one portfolio company paying more than its share of expenses that benefited both companies, harming the fund that owned the overpaying company.
- PCS and CTS were sold together in a joint sale in 2013.
- The SEC instituted a settled administrative proceeding; LMI consented to the order without admitting or denying the findings (except jurisdiction).

## Issues

1. Whether LMI breached its fiduciary duty under Investment Advisers Act § 206(2) by permitting unfair cross-fund expense allocations between integrated portfolio companies.
2. Whether LMI violated Advisers Act § 206(4) and Rule 206(4)-7 by failing to adopt and implement written compliance policies and procedures reasonably designed to prevent expense misallocations and related conflicts in an integrated, cross-fund portfolio structure.

## Decision

- The SEC found that LMI violated Advisers Act § 206(2) by breaching its fiduciary duty through improper allocation of shared expenses between portfolio companies owned by different advised funds.
- The SEC found that LMI violated Advisers Act § 206(4) and Rule 206(4)-7 by failing to adopt and implement written policies and procedures reasonably designed to prevent Advisers Act violations arising from the integration of cross-fund portfolio companies.
- The SEC ordered LMI to cease and desist from committing or causing violations (and future violations) of §§ 206(2) and 206(4) and Rule 206(4)-7.
- The SEC imposed monetary remedies, including disgorgement, prejudgment interest, and a civil penalty.

## Legal Principles

- An investment adviser owes fiduciary duties to each advised fund and must address conflicts created when different funds’ portfolio companies share personnel, operations, and expenses.
- Under Advisers Act § 206(2), an adviser may violate its fiduciary obligations through negligent conduct that results in unfair treatment of a client, including causing one fund to subsidize another through misallocated portfolio-company expenses.
- General disclosure of an integration strategy and a planned combined exit does not excuse unfair expense allocation practices or undisclosed conflicts between fund clients.
- Advisers Act § 206(4) and Rule 206(4)-7 require written policies and procedures reasonably designed to prevent violations; compliance programs must address foreseeable cross-fund risks such as shared-service billing and testing of allocation practices.

## Conclusion

The SEC concluded that LMI’s failure to apply its revenue-based allocation policy consistently caused one fund’s portfolio company to bear an unfair share of shared expenses, constituting a fiduciary breach under § 206(2), and that LMI lacked compliance policies and procedures reasonably designed to prevent or detect these cross-fund allocation conflicts, violating § 206(4) and Rule 206(4)-7.


In re Lincolnshire Mgmt., Inc., Investment Advisers Act Release No. 3927 (Sept. 22, 2014)