The Securities and Exchange Commission (SEC) has 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-end investment company, which resulted in the mutual fund temporarily paying a disproportionately high amount of fees.
The SEC’s order finds that Catalyst improperly arranged for the Trust to pay, at least initially, the legal fees and expenses associated with regulatory inquiries and private litigation following significant losses at the Catalyst Hedged Futures Strategy Fund, a series of the Trust.
As set forth in the order, Catalyst and the Trust began receiving inquiries from the SEC and another regulator beginning in February 2017 related to the Hedged Futures Fund losses, followed by an April 2017 class action and an August 2017 shareholder derivative action.
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 for the Trust to pay the legal fees and related costs and subsequently submit those bills to the Trust’s insurer, including the expenses associated with Catalyst’s legal representation.
According to the order, Catalyst avoided paying legal fees from May 2017 through March 2020, and did not reimburse the Trust for its share of the fees until after that time. The order finds that Catalyst benefitted from the impermissible joint arrangement by, among other things, deferring payment of its legal bills for multiple years.
The SEC’s order finds that Catalyst violated Section 17(d) of the Investment Company Act of 1940 and Rule 17d-1 thereunder, which prohibit joint transactions with affiliates of registered investment companies, and Section 206(2) of the Investment Advisers Act of 1940, an antifraud provision of the securities laws.
Without admitting or denying the findings, Catalyst consented to a cease-and-desist order and a censure, and agreed to pay disgorgement of $280,902, of which $183,757 is offset by a previous payment to the Trust, prejudgment interest of $30,081, and a civil penalty of $200,000.
