In re WL ROSS & CO. LLC

 
 
 
 
UNITED STATES OF AMERICA 
Before the 
SECURITIES AND EXCHANGE COMMISSION 
 
INVESTMENT ADVISERS ACT OF 1940 
Release No. 4494 / August 24, 2016 
 
ADMINISTRATIVE PROCEEDING 
File No. 3-17491 
 
 
In the Matter of  
 
 WL ROSS & CO. LLC 
 
Respondent. 
 
ORDER INSTITUTING CEASE-AND- 
DESIST PROCEEDINGS PURSUANT TO 
SECTION 203(k) OF THE INVESTMENT 
ADVISERS ACT OF 1940, MAKING 
FINDINGS, AND IMPOSING A CEASE- 
AND-DESIST ORDER  
 
 
I. 
 
The Securities and Exchange Commission (“Commission”) deems it appropriate that 
cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 203(k) of the 
Investment Advisers Act of 1940 (“Advisers Act”) against WL Ross & Co. LLC (“WL Ross” or 
“WLR” or “Respondent”). 
 
II. 
 
In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 
purpose of these proceedings and any other proceedings brought by or on behalf of the 
Commission, or to which the Commission is a party, and without admitting or denying the 
findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these 
proceedings, which are admitted, Respondent consents to the entry of this Order Instituting 
Cease-and-Desist Proceedings Pursuant to Section 203(k) of the Investment Advisers Act of 
1940, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. 
 
III. 
 
On the basis of this Order and Respondent’s Offer, the Commission finds
1
 
that:
                                                 
1
 The findings herein are made pursuant to Respondent’s Offer and are not binding on any other person or entity in 
this or any other proceeding. 
 
 
 
 

 
 
2 
 
SUMMARY 
 
1. These proceedings arise from the failure of private equity fund adviser WL Ross 
to disclose its fee allocation practices to certain private equity funds it advised (the “WLR 
Funds”) and their investors, which resulted in the WLR Funds paying higher management fees 
between 2001 and 2011.  Respondent WL Ross is a private equity firm that focuses on investing 
in and restructuring financially distressed companies. WL Ross provides investment advisory 
services to the WLR Funds, as well as to other private equity funds, co-investment vehicles, and 
separately managed accounts. WL Ross also provides advisory and other services to certain 
portfolio companies in which its clients invest. The limited partnership agreements (the “LPAs”) 
governing the WLR Funds contemplate that WL Ross may receive fees from the portfolio 
companies for certain services that WL Ross provides from time to time. These fees, as defined 
in the relevant LPAs for the WLR Funds, include break-up, origination, commitment, broken 
deal, topped bid, cancellation, monitoring, closing, financial advisory, investment banking, 
director or other transaction fees (collectively, “Transaction Fees”).     
 
2. The LPAs provide that the quarterly management fees payable by the WLR 
Funds to WL Ross “shall be reduced” by an amount equal to 50% (or 80%, depending on the 
particular fund’s LPA) of “any” Transaction Fees received by WL Ross during the prior quarter 
from portfolio investments of the WLR Funds.  Accordingly, WL Ross allocates a percentage of 
the Transaction Fees it receives from the portfolio companies to the WLR Funds in order to 
offset the quarterly management fees payable by the WLR Funds. The WLR Funds’ governing 
documents, however, do not disclose how Transaction Fees shall be allocated when multiple 
WLR Funds and other co-investors are invested in the same portfolio company. 
 
3. Between 2001 and 2011, WL Ross adopted a Transaction Fee allocation 
methodology that resulted in WLR retaining a significant amount of those fees for itself rather 
than allocating them to the WLR Funds for the purpose of offsetting the management fee. 
Specifically, WL Ross allocated Transaction Fees that it earned from portfolio investments to the 
WLR Funds based upon their relative ownership percentages of the portfolio company without 
disclosing this practice. As a result, WL Ross retained for itself that portion of the Transaction 
Fees that was based upon co-investors’ relative ownership of the portfolio company, without 
subjecting such fees to any management fee offsets. WLR did not disclose to the WLR Funds 
and to the Funds’ limited partners that it would allocate Transaction Fees according to the above 
allocation methodology, and that WLR construed the ambiguous provisions in the relevant LPAs 
in its own favor rather than the WLR Funds’ favor. If WL Ross had instead adopted a 
methodology requiring the allocation of all Transaction Fees pro rata among the investing WLR 
Funds (and other WLR funds that also had offset provisions) and offset the WLR Funds’ 
management fees accordingly, the WLR Funds (and other WLR funds that also had offset 
provisions) would have received the benefit of all Transaction Fees received by WL Ross. WL 
Ross received approximately $10.4 million more in management fees using the selected 
methodology than if it had allocated Transaction Fees pro rata among the WLR Funds for 
management fee offset purposes during the relevant time period. 
 
4. WLR did not disclose to the WLR Funds, their Advisory Boards, and to the 
Funds’ limited partners that it would allocate Transaction Fees to the WLR Funds based on the 
Funds’ relative ownership percentages of the portfolio company and that WLR retained that 

 
 
3 
 
portion of the Transaction Fees that was based upon the relative ownership percentages of the 
portfolio company attributable to co-investors. As a result, WLR omitted material information 
concerning its fee allocation practices in violation of Sections 206(2) and 206(4) of the Advisers 
Act and Rule 206(4)-8 thereunder. 
 
RESPONDENT 
 
5. WL Ross & Co. LLC, a Delaware limited liability company, is a private equity 
firm that was founded in 2000.  WL Ross registered as an investment adviser with the 
Commission in April 2007.  WL Ross is headquartered in New York, New York. Since 2006, 
WL Ross has been wholly owned by Invesco Private Capital, Inc., a subsidiary of Invesco Ltd., a 
publicly traded company (collectively, “Invesco”).  WL Ross provides investment advisory 
services to the WLR Funds and other private equity funds, as well as to separately managed 
accounts and co-investment vehicles. According to its most recent Form ADV filing as of April 
21, 2016, WL Ross has approximately $4.6 billion in assets under management. 
 
RELEVANT ENTITIES 
 
6. WLR Recovery Fund, L.P.; WLR Recovery Fund II, L.P.; Invesco Mortgage 
Recovery Feeder Fund, L.P.; WLR IV PPIP Co-Invest, L.P. and WLR Whole Loan Fund, L.P. 
(collectively, the “WLR Funds”) are each Delaware limited partnerships and private investment 
funds formed to make investments in a variety of assets.  None of the WLR Funds is registered 
with the Commission in any capacity. WL Ross provides investment advisory services to all of 
the WLR Funds. 
 
FACTS 
 
A. Background 
 
7. WL Ross is a New York-based private equity firm that advises the WLR Funds 
and other private equity funds, as well as separately managed accounts and co-investment 
vehicles, with a focus on investing in and restructuring financially distressed companies.  The 
limited partners in the WLR Funds include pension funds, university endowments and other 
large institutional investors, and high net worth individuals.  The limited partners typically 
commit a specified amount of capital to a fund for its use to make qualifying investments during 
the investment period of the fund.  Each WLR Fund has an Advisory Board, comprised of certain 
limited partners, to advise regarding conflicts of interest, valuations of securities and other 
issues. 
 
8. Each WLR Fund is governed by an LPA setting forth the rights and obligations 
of its limited partners, including their obligations to pay advisory and other fees and expenses to 
WL Ross pursuant to a separate management agreement between the fund and WL Ross. 
Among other fees and expenses, WL Ross charges each WLR Fund an annual advisory or 
management fee, which generally ranges from 0.75% to 1.5% of committed capital during the 
investment period. 
 

 
 
4 
 
9. From time to time, WL Ross also receives Transaction Fees directly from certain 
portfolio investments of the WLR Funds for providing monitoring, financial advisory, and other 
services, as contemplated by the LPAs in certain circumstances.  The Transaction Fees paid by 
portfolio companies to WL Ross are in addition to the management fees paid by the WLR Funds 
to WL Ross.  WL Ross allocates a percentage of the Transaction Fees it receives from the 
portfolio companies to the WLR Funds in order to offset the quarterly management fees payable 
by the WLR Funds.  The offset percentage is set forth in each fund’s LPA.  All of the WLR Fund 
LPAs provide for a 50% management fee offset with the exception of the WLR Recovery Fund, 
L.P. (“Fund I”), which provides for an 80% management fee offset. 
 
10. The LPA provisions concerning the management fee offsets for the WLR Funds 
are all substantially similar to the language in the WLR Recovery Fund II, L.P. LPA, which 
provides at Section 5.03, Management Fees, that: 
 
The Management Fee shall be reduced in any given quarter by an amount equal to 
fifty percent (50%) of any break-up, origination, commitment, broken deal, topped bid, 
cancellation, monitoring, closing, financial advisory, investment banking, director 
or other transaction fees received by the General Partner or any Affiliate thereof during 
the prior quarter from Portfolio Investments.
2
 
 
11. WLR omitted material information regarding how Transaction Fees shall be 
allocated when multiple WLR Funds and co-investors are invested in the same portfolio 
company. 
 
B. WL Ross’ Historical Transaction Fee Allocation Practice 
 
12. WL Ross’ Transaction Fee allocation practice originated in 2001 in connection 
with the allocation of co-investment fees arising from a certain transaction (the “2001 
Transaction”).
3
  In 2001, WL Ross formed a special purpose limited partnership (“SPLP”) for the 
sole purpose of investing in the 2001 Transaction.  The SPLP was comprised of three WLR 
funds - Asia Recovery Fund, L.P., Asia Recovery Co-Investment Partners, L.P. (collectively, 
“Asia Funds”), and Fund I - as well as other co-investors. Together, Fund I and the two Asia 
Funds contributed approximately 40% in capital to the SPLP, while the co-investors contributed 
the remaining 60% in capital.  Upon acquiring the portfolio company, the SPLP co-investors 
paid WL Ross a one-time $3.9 million fee as compensation for negotiating, advising and 
structuring the 2001 Transaction. 
 
13. Allocating the entire $3.9 million co-investment fee to each of the three funds in 
the 2001 Transaction would have resulted in WL Ross providing total management fee offsets to 
the funds greater than the actual co-investment fee it received in connection with the 
                                                 
2
 “Portfolio Investments” is defined in the LPA as “assets of the Partnership” that are invested in securities of 
companies. 
 
3
 Although WL Ross later determined that the LPAs did not require that co-investment fees paid to WL Ross by co-
investors be allocated to the WLR Funds for offset purposes, it devised the allocation practice at the time of the 2001 
Transaction and applied it consistently to both co-investment fees and Transaction Fees until 2014. 
 

 
 
5 
 
transaction.
4
  WL Ross instead determined to allocate the $3.9 million co-investment fee to the 
two Asia Funds and Fund I based on their relative ownership percentages of the portfolio 
company.  Because the three funds collectively owned 40% of the portfolio company, WL Ross 
allocated 40% of the $3.9 million co-investment fee to the funds (approximately $1.6 million), 
and then offset the funds’ management fees according to the fee offset percentages specified in 
each fund’s LPA (80% for Fund I, 50% for each Asia Fund), resulting in a combined 
management fee offset of $962,000 for the three funds. 
 
14. By interpreting the ambiguous language in the relevant LPAs as permitting it to 
adopt this allocation methodology, WL Ross retained 60% of the fee that was based on the co-
investors’ 60% ownership share of the portfolio company.  If WL Ross instead had adopted a 
methodology allocating all of the fees pro rata among the investing WLR funds, the three WLR 
funds investing in the 2001 Transaction would have received management fee offsets totaling 
$2.35 million rather than the $962,000 they actually received.
5
 
 
15. Beginning with the 2001 Transaction and through 2011, WL Ross consistently 
allocated Transaction Fees it received from portfolio investments to the WLR Funds according to 
their ownership percentages of the portfolio companies.  If WL Ross had instead allocated 
Transaction Fees pro rata between the investing WLR Funds, the WLR Funds would have 
received a larger credit for purposes of management fee offsets.  By retaining the portion of the 
Transaction Fees allocable to co-investors’ relative ownership share of the portfolio companies, 
WL Ross received approximately $10.4 million in additional management fees from the WLR 
Funds during the ten-year period between 2001 and 2011. 
 
16. As noted above, WLR did not disclose how to allocate Transaction Fees when 
multiple WLR funds and co-investors are invested in a portfolio company.  WL Ross did not 
disclose to the WLR Funds, the Funds’ Advisory Boards, or the Funds’ limited partners its 
chosen practice of allocating Transaction Fees based upon the WLR Funds’ relative ownership 
percentages of the portfolio company.  As a result, the WLR Funds, their boards, and limited 
partners may not have been aware that the WLR Funds did not receive that portion of the 
Transaction Fees allocable to co-investors’ ownership percentages of the portfolio companies, or 
that WL Ross retained for itself that portion of the Transaction Fees instead. 
 
C. 2014 OCIE Examination, WL Ross’ Remediation, and Implementation of New 
Allocation Methodology 
 
                                                 
4
 Using that approach, WL Ross would have been required to allocate fee offsets to Fund I of $3.12 million (80% of 
$3.9 million) and fee offsets to the two Asia Funds of $1.95 million each (50% of $3.9 million), totaling $7.02 
million in management fee offsets on the $3.9 million co-investment fee received by WL Ross. 
 
5
 Fund I held approximately 14% and the two Asia Funds collectively held approximately 26% of the three funds’ 
combined 40% ownership in the 2001 Transaction.  If WLR had adopted a pro rata allocation methodology, Fund I 
would have been allocated approximately 35% (or 14% of 40%) of the $3.9 million co-investors’ fee, or $1.4 
million, and the two Asia Funds collectively would have been allocated 65% (or 26% of 40%) of the $3.9 million 
fee, or $2.5 million.  Those allocations would then have been subject to the offset provisions of the LPAs, and the 
funds would have received management fee offsets of $1.1 million (Fund I, 80% offset), and $1.25 million (Asia 
Funds, 50% offsets), for a combined management fee offset of approximately $2.35 million between the three funds. 

 
 
6 
 
17. In 2014, staff from the Commission’s Office of Compliance Inspections and 
Examinations (“OCIE”) conducted an examination of WL Ross.  In reviewing management fee 
and fee offset data produced to the OCIE staff, WL Ross determined to revisit the methodology 
used to allocate Transaction Fees to WLR Funds that had invested with co-investors in portfolio 
companies.  On August 20, 2014, WL Ross brought the issue to the attention of the OCIE staff. 
 
18. After conducting an internal review, WL Ross voluntarily proposed and adopted 
a new methodology allocating all Transaction Fees received from a portfolio company pro rata 
across the WLR Funds that participated in the portfolio investment and recognized that it had not 
done so in the past.  WL Ross then voluntarily retroactively applied this methodology to 
recalculate all historical management fees and offsets dating back to the inception of the funds.  
WLR adopted this new methodology even for its later funds where the LPAs specifically 
contemplated the use of the older methodology. WL Ross submitted its reimbursement 
calculations for review and verification to the WLR Funds’ independent auditor, as well as to 
Invesco’s Internal Audit Group, an independent accounting firm, and a forensic accounting firm. 
 
19. WL Ross voluntarily reimbursed the WLR Funds approximately $10.4 million in 
management fees and $1.4 million in interest during the course of the OCIE exam and the staff’s 
investigation as a result of retroactively applying its corrected Transaction Fee allocation 
methodology to the inception of the funds. WL Ross also disclosed the new methodology and 
reimbursement to the WLR Funds’ investors in a series of written communications and meetings. 
 
20. Since the OCIE exam, WL Ross has voluntarily taken a number of actions to 
strengthen its controls and compliance systems.  WL Ross hired a new Chief Compliance Officer 
(“CCO”) and the CCO now participates in all of WL Ross’ key committees.  WL Ross also 
engaged an independent accounting firm to perform an internal controls review of its back-office 
functions, and implemented the firm’s recommendations for enhancements to its processes and 
internal controls, including to the expense review and approval process and the tracking and 
monitoring of Transaction Fees. 
 
21. WL Ross also implemented new controls concerning the review and approval of 
expense reimbursements and fee offsets. In December 2014, WL Ross revised the Expense 
Processing and Allocation Policy it had adopted in 2011. Under the revised policy, management 
fee calculations as well as Transaction Fees from portfolio investments and related fee offset 
calculations must be reviewed and approved by the Chief Financial Officer and the Expense 
Review Group, a new group comprised of senior management, the Chief Financial Officer, and 
legal and compliance representatives, to ensure appropriate allocations and compliance with the 
relevant fund offering documents and agreements. 
 
VIOLATIONS 
 
22. As a result of the conduct described above, WL Ross violated Section 206(2) of 
the Advisers Act, which prohibits an investment adviser, directly or indirectly, from engaging “in 
any transaction, practice, or course of business which operates as a fraud or deceit upon any 
client or prospective client.” A violation of Section 206(2) may rest on a finding of simple 
negligence. SEC v. Steadman, 967 F.2d 636, 643 n.5 (D.C. Cir. 1999) (citing SEC v. Capital 
Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963)). Proof of scienter is not required to 
establish a violation of Section 206(2) of the Advisers Act.  Id.  

 
 
7 
 
 
23. As a result of the conduct described above, WL Ross violated Section 206(4) of 
the Advisers Act and Rule 206(4)-8 thereunder, which make it unlawful for any investment 
adviser to a pooled investment vehicle to “[m]ake any untrue statement of a material fact or omit 
to state a material fact necessary to make the statements made, in the light of the circumstances 
under which they were made, not misleading, to any investor or prospective investor in the 
pooled investment vehicle,” or “engage in any act, practice, or course of business that is 
fraudulent, deceptive or manipulative with respect to any investor or prospective investor in the 
pooled investment vehicle.”  A violation of Section 206(4) and the rules thereunder does not 
require scienter.  Steadman, 967 F.2d at 647. 
 
WL  ROSS ’ COOPERATION AND REMEDIAL EFFORTS 
 
24. In determining to accept the Offer, the Commission considered remedial acts 
promptly undertaken by WL Ross and cooperation afforded the Commission staff, including WL 
Ross’ self-reporting of the Transaction Fee allocation issue to the OCIE staff, WL Ross’ 
voluntary determination to revise its fee allocation methodology, and WL Ross’ voluntary 
reimbursement, with interest, of $11,873,571 in management fee credits resulting from its 
retroactive application of the revised allocation methodology to the inception of the WLR Funds. 
 
IV. 
 
In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
agreed to in Respondent’s Offer: 
Accordingly, pursuant to Section 203(k) of the Advisers Act, it is hereby ORDERED 
that:  
A. Respondent shall cease and desist from committing or causing any violations and 
any future violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 
thereunder. 
B. Respondent shall, within ten (10) days of entry of this Order, pay a civil money 
penalty in the amount of $2.3 million to the Securities and Exchange Commission for transfer to 
the general fund of the United States Treasury, subject to Section 21F(g)(3) of the Securities 
Exchange Act of 1934.  If timely payment is not made, additional interest shall accrue pursuant 
to 31 U.S.C. §3717.  Payment must be made in one of the following ways: 
 
(1) Respondent may transmit payment electronically to the Commission, 
which will provide detailed ACH transfer/Fedwire instructions upon 
request; 
 
(2) Respondent may make direct payment from a bank account via Pay.gov 
through the SEC website at http://www.sec.gov/about/offices/ofm.htm; 
or 
 

 
 
8 
 
(3) Respondent may pay by certified check, bank cashier’s check, or United 
States postal money order, made payable to the Securities and Exchange 
Commission and hand-delivered or mailed to: 
 
Enterprise Services Center  
Accounts Receivable Branch  
HQ Bldg., Room 181, AMZ-341 
6500 South MacArthur Boulevard  
Oklahoma City, OK 73169 
 
Payments by check or money order must be accompanied by a cover letter identifying 
WL Ross as a Respondent in these proceedings, and the file number of these proceedings; a copy 
of the cover letter and check or money order must be sent to Panayiota K. Bougiamas, Assistant 
Regional Director, Asset Management Unit, Division of Enforcement, Securities and Exchange 
Commission, Brookfield Place, 200 Vesey Street, Suite 400, New York, NY 10281. 
 
By the Commission. 
 
 
 
 
Brent J. Fields  
Secretary 

UNITED STATES OF AMERICA 

Before the 

SECURITIES AND EXCHANGE COMMISSION 
 
INVESTMENT ADVISERS ACT OF 1940 

Release No. 4494 / August 24, 2016 
 
ADMINISTRATIVE PROCEEDING 

File No. 3-17491 
 

 

In the Matter of  

 

 WL ROSS & CO. LLC 

 

Respondent. 

 

ORDER INSTITUTING CEASE-AND- 

DESIST PROCEEDINGS PURSUANT TO 

SECTION 203(k) OF THE INVESTMENT 

ADVISERS ACT OF 1940, MAKING 

FINDINGS, AND IMPOSING A CEASE- 

AND-DESIST ORDER  

 

 

I. 
 

The Securities and Exchange Commission (“Commission”) deems it appropriate that 

cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 203(k) of the 

Investment Advisers Act of 1940 (“Advisers Act”) against WL Ross & Co. LLC (“WL Ross” or 

“WLR” or “Respondent”). 
 

II. 
 

In anticipation of the institution of these proceedings, Respondent has submitted an Offer 

of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 

purpose of these proceedings and any other proceedings brought by or on behalf of the 

Commission, or to which the Commission is a party, and without admitting or denying the 

findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these 

proceedings, which are admitted, Respondent consents to the entry of this Order Instituting 

Cease-and-Desist Proceedings Pursuant to Section 203(k) of the Investment Advisers Act of 

1940, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. 
 

III. 
 

On the basis of this Order and Respondent’s Offer, the Commission finds
1 that:

                                                 
1
 The findings herein are made pursuant to Respondent’s Offer and are not binding on any other person or entity in 

this or any other proceeding. 

 

 

 

 



 

 

2 

 

SUMMARY 
 

1. These proceedings arise from the failure of private equity fund adviser WL Ross 

to disclose its fee allocation practices to certain private equity funds it advised (the “WLR 

Funds”) and their investors, which resulted in the WLR Funds paying higher management fees 

between 2001 and 2011.  Respondent WL Ross is a private equity firm that focuses on investing 

in and restructuring financially distressed companies. WL Ross provides investment advisory 

services to the WLR Funds, as well as to other private equity funds, co-investment vehicles, and 

separately managed accounts. WL Ross also provides advisory and other services to certain 

portfolio companies in which its clients invest. The limited partnership agreements (the “LPAs”) 

governing the WLR Funds contemplate that WL Ross may receive fees from the portfolio 

companies for certain services that WL Ross provides from time to time. These fees, as defined 

in the relevant LPAs for the WLR Funds, include break-up, origination, commitment, broken 

deal, topped bid, cancellation, monitoring, closing, financial advisory, investment banking, 

director or other transaction fees (collectively, “Transaction Fees”).     
 

2. The LPAs provide that the quarterly management fees payable by the WLR 

Funds to WL Ross “shall be reduced” by an amount equal to 50% (or 80%, depending on the 

particular fund’s LPA) of “any” Transaction Fees received by WL Ross during the prior quarter 

from portfolio investments of the WLR Funds.  Accordingly, WL Ross allocates a percentage of 

the Transaction Fees it receives from the portfolio companies to the WLR Funds in order to 

offset the quarterly management fees payable by the WLR Funds. The WLR Funds’ governing 

documents, however, do not disclose how Transaction Fees shall be allocated when multiple 

WLR Funds and other co-investors are invested in the same portfolio company. 
 

3. Between 2001 and 2011, WL Ross adopted a Transaction Fee allocation 

methodology that resulted in WLR retaining a significant amount of those fees for itself rather 

than allocating them to the WLR Funds for the purpose of offsetting the management fee. 

Specifically, WL Ross allocated Transaction Fees that it earned from portfolio investments to the 

WLR Funds based upon their relative ownership percentages of the portfolio company without 

disclosing this practice. As a result, WL Ross retained for itself that portion of the Transaction 

Fees that was based upon co-investors’ relative ownership of the portfolio company, without 

subjecting such fees to any management fee offsets. WLR did not disclose to the WLR Funds 

and to the Funds’ limited partners that it would allocate Transaction Fees according to the above 

allocation methodology, and that WLR construed the ambiguous provisions in the relevant LPAs 

in its own favor rather than the WLR Funds’ favor. If WL Ross had instead adopted a 

methodology requiring the allocation of all Transaction Fees pro rata among the investing WLR 

Funds (and other WLR funds that also had offset provisions) and offset the WLR Funds’ 

management fees accordingly, the WLR Funds (and other WLR funds that also had offset 

provisions) would have received the benefit of all Transaction Fees received by WL Ross. WL 

Ross received approximately $10.4 million more in management fees using the selected 

methodology than if it had allocated Transaction Fees pro rata among the WLR Funds for 

management fee offset purposes during the relevant time period. 
 

4. WLR did not disclose to the WLR Funds, their Advisory Boards, and to the 

Funds’ limited partners that it would allocate Transaction Fees to the WLR Funds based on the 

Funds’ relative ownership percentages of the portfolio company and that WLR retained that 



 

 

3 

 

portion of the Transaction Fees that was based upon the relative ownership percentages of the 

portfolio company attributable to co-investors. As a result, WLR omitted material information 

concerning its fee allocation practices in violation of Sections 206(2) and 206(4) of the Advisers 

Act and Rule 206(4)-8 thereunder. 

 

RESPONDENT 
 

5. WL Ross & Co. LLC, a Delaware limited liability company, is a private equity 

firm that was founded in 2000.  WL Ross registered as an investment adviser with the 

Commission in April 2007.  WL Ross is headquartered in New York, New York. Since 2006, 

WL Ross has been wholly owned by Invesco Private Capital, Inc., a subsidiary of Invesco Ltd., a 

publicly traded company (collectively, “Invesco”).  WL Ross provides investment advisory 

services to the WLR Funds and other private equity funds, as well as to separately managed 

accounts and co-investment vehicles. According to its most recent Form ADV filing as of April 

21, 2016, WL Ross has approximately $4.6 billion in assets under management. 
 

RELEVANT ENTITIES 
 

6. WLR Recovery Fund, L.P.; WLR Recovery Fund II, L.P.; Invesco Mortgage 

Recovery Feeder Fund, L.P.; WLR IV PPIP Co-Invest, L.P. and WLR Whole Loan Fund, L.P. 

(collectively, the “WLR Funds”) are each Delaware limited partnerships and private investment 

funds formed to make investments in a variety of assets.  None of the WLR Funds is registered 

with the Commission in any capacity. WL Ross provides investment advisory services to all of 

the WLR Funds. 
 

FACTS 
 

A. Background 
 

7. WL Ross is a New York-based private equity firm that advises the WLR Funds 

and other private equity funds, as well as separately managed accounts and co-investment 

vehicles, with a focus on investing in and restructuring financially distressed companies.  The 

limited partners in the WLR Funds include pension funds, university endowments and other 

large institutional investors, and high net worth individuals.  The limited partners typically 

commit a specified amount of capital to a fund for its use to make qualifying investments during 

the investment period of the fund.  Each WLR Fund has an Advisory Board, comprised of certain 

limited partners, to advise regarding conflicts of interest, valuations of securities and other 

issues. 
 

8. Each WLR Fund is governed by an LPA setting forth the rights and obligations 

of its limited partners, including their obligations to pay advisory and other fees and expenses to 

WL Ross pursuant to a separate management agreement between the fund and WL Ross. 

Among other fees and expenses, WL Ross charges each WLR Fund an annual advisory or 

management fee, which generally ranges from 0.75% to 1.5% of committed capital during the 

investment period. 
 



 

 

4 

 

9. From time to time, WL Ross also receives Transaction Fees directly from certain 

portfolio investments of the WLR Funds for providing monitoring, financial advisory, and other 

services, as contemplated by the LPAs in certain circumstances.  The Transaction Fees paid by 

portfolio companies to WL Ross are in addition to the management fees paid by the WLR Funds 

to WL Ross.  WL Ross allocates a percentage of the Transaction Fees it receives from the 

portfolio companies to the WLR Funds in order to offset the quarterly management fees payable 

by the WLR Funds.  The offset percentage is set forth in each fund’s LPA.  All of the WLR Fund 

LPAs provide for a 50% management fee offset with the exception of the WLR Recovery Fund, 

L.P. (“Fund I”), which provides for an 80% management fee offset. 
 

10. The LPA provisions concerning the management fee offsets for the WLR Funds 

are all substantially similar to the language in the WLR Recovery Fund II, L.P. LPA, which 

provides at Section 5.03, Management Fees, that: 
 

The Management Fee shall be reduced in any given quarter by an amount equal to 

fifty percent (50%) of any break-up, origination, commitment, broken deal, topped bid, 

cancellation, monitoring, closing, financial advisory, investment banking, director 

or other transaction fees received by the General Partner or any Affiliate thereof during 

the prior quarter from Portfolio Investments.
2

 

 
11. WLR omitted material information regarding how Transaction Fees shall be 

allocated when multiple WLR Funds and co-investors are invested in the same portfolio 

company. 
 
B. WL Ross’ Historical Transaction Fee Allocation Practice 
 

12. WL Ross’ Transaction Fee allocation practice originated in 2001 in connection 

with the allocation of co-investment fees arising from a certain transaction (the “2001 

Transaction”).
3
  In 2001, WL Ross formed a special purpose limited partnership (“SPLP”) for the 

sole purpose of investing in the 2001 Transaction.  The SPLP was comprised of three WLR 

funds - Asia Recovery Fund, L.P., Asia Recovery Co-Investment Partners, L.P. (collectively, 

“Asia Funds”), and Fund I - as well as other co-investors. Together, Fund I and the two Asia 

Funds contributed approximately 40% in capital to the SPLP, while the co-investors contributed 

the remaining 60% in capital.  Upon acquiring the portfolio company, the SPLP co-investors 

paid WL Ross a one-time $3.9 million fee as compensation for negotiating, advising and 

structuring the 2001 Transaction. 
 

13. Allocating the entire $3.9 million co-investment fee to each of the three funds in 
the 2001 Transaction would have resulted in WL Ross providing total management fee offsets to 
the funds greater than the actual co-investment fee it received in connection with the 

                                                 
2
 “Portfolio Investments” is defined in the LPA as “assets of the Partnership” that are invested in securities of 

companies. 

 
3
 Although WL Ross later determined that the LPAs did not require that co-investment fees paid to WL Ross by co-

investors be allocated to the WLR Funds for offset purposes, it devised the allocation practice at the time of the 2001 

Transaction and applied it consistently to both co-investment fees and Transaction Fees until 2014. 

 



 

 

5 

 

transaction.
4
  WL Ross instead determined to allocate the $3.9 million co-investment fee to the 

two Asia Funds and Fund I based on their relative ownership percentages of the portfolio 
company.  Because the three funds collectively owned 40% of the portfolio company, WL Ross 
allocated 40% of the $3.9 million co-investment fee to the funds (approximately $1.6 million), 
and then offset the funds’ management fees according to the fee offset percentages specified in 
each fund’s LPA (80% for Fund I, 50% for each Asia Fund), resulting in a combined 
management fee offset of $962,000 for the three funds. 
 

14. By interpreting the ambiguous language in the relevant LPAs as permitting it to 

adopt this allocation methodology, WL Ross retained 60% of the fee that was based on the co-

investors’ 60% ownership share of the portfolio company.  If WL Ross instead had adopted a 

methodology allocating all of the fees pro rata among the investing WLR funds, the three WLR 

funds investing in the 2001 Transaction would have received management fee offsets totaling 

$2.35 million rather than the $962,000 they actually received.
5

 

 
15. Beginning with the 2001 Transaction and through 2011, WL Ross consistently 

allocated Transaction Fees it received from portfolio investments to the WLR Funds according to 

their ownership percentages of the portfolio companies.  If WL Ross had instead allocated 

Transaction Fees pro rata between the investing WLR Funds, the WLR Funds would have 

received a larger credit for purposes of management fee offsets.  By retaining the portion of the 

Transaction Fees allocable to co-investors’ relative ownership share of the portfolio companies, 

WL Ross received approximately $10.4 million in additional management fees from the WLR 

Funds during the ten-year period between 2001 and 2011. 
 

16. As noted above, WLR did not disclose how to allocate Transaction Fees when 

multiple WLR funds and co-investors are invested in a portfolio company.  WL Ross did not 

disclose to the WLR Funds, the Funds’ Advisory Boards, or the Funds’ limited partners its 

chosen practice of allocating Transaction Fees based upon the WLR Funds’ relative ownership 

percentages of the portfolio company.  As a result, the WLR Funds, their boards, and limited 

partners may not have been aware that the WLR Funds did not receive that portion of the 

Transaction Fees allocable to co-investors’ ownership percentages of the portfolio companies, or 

that WL Ross retained for itself that portion of the Transaction Fees instead. 
 
C. 2014 OCIE Examination, WL Ross’ Remediation, and Implementation of New 

Allocation Methodology 
 

                                                 
4
 Using that approach, WL Ross would have been required to allocate fee offsets to Fund I of $3.12 million (80% of 

$3.9 million) and fee offsets to the two Asia Funds of $1.95 million each (50% of $3.9 million), totaling $7.02 

million in management fee offsets on the $3.9 million co-investment fee received by WL Ross. 

 
5
 Fund I held approximately 14% and the two Asia Funds collectively held approximately 26% of the three funds’ 

combined 40% ownership in the 2001 Transaction.  If WLR had adopted a pro rata allocation methodology, Fund I 

would have been allocated approximately 35% (or 14% of 40%) of the $3.9 million co-investors’ fee, or $1.4 

million, and the two Asia Funds collectively would have been allocated 65% (or 26% of 40%) of the $3.9 million 

fee, or $2.5 million.  Those allocations would then have been subject to the offset provisions of the LPAs, and the 

funds would have received management fee offsets of $1.1 million (Fund I, 80% offset), and $1.25 million (Asia 

Funds, 50% offsets), for a combined management fee offset of approximately $2.35 million between the three funds. 



 

 

6 

 

17. In 2014, staff from the Commission’s Office of Compliance Inspections and 

Examinations (“OCIE”) conducted an examination of WL Ross.  In reviewing management fee 

and fee offset data produced to the OCIE staff, WL Ross determined to revisit the methodology 

used to allocate Transaction Fees to WLR Funds that had invested with co-investors in portfolio 

companies.  On August 20, 2014, WL Ross brought the issue to the attention of the OCIE staff. 
 

18. After conducting an internal review, WL Ross voluntarily proposed and adopted 

a new methodology allocating all Transaction Fees received from a portfolio company pro rata 

across the WLR Funds that participated in the portfolio investment and recognized that it had not 

done so in the past.  WL Ross then voluntarily retroactively applied this methodology to 

recalculate all historical management fees and offsets dating back to the inception of the funds.  

WLR adopted this new methodology even for its later funds where the LPAs specifically 

contemplated the use of the older methodology. WL Ross submitted its reimbursement 

calculations for review and verification to the WLR Funds’ independent auditor, as well as to 

Invesco’s Internal Audit Group, an independent accounting firm, and a forensic accounting firm. 
 

19. WL Ross voluntarily reimbursed the WLR Funds approximately $10.4 million in 

management fees and $1.4 million in interest during the course of the OCIE exam and the staff’s 

investigation as a result of retroactively applying its corrected Transaction Fee allocation 

methodology to the inception of the funds. WL Ross also disclosed the new methodology and 

reimbursement to the WLR Funds’ investors in a series of written communications and meetings. 
 

20. Since the OCIE exam, WL Ross has voluntarily taken a number of actions to 

strengthen its controls and compliance systems.  WL Ross hired a new Chief Compliance Officer 

(“CCO”) and the CCO now participates in all of WL Ross’ key committees.  WL Ross also 

engaged an independent accounting firm to perform an internal controls review of its back-office 

functions, and implemented the firm’s recommendations for enhancements to its processes and 

internal controls, including to the expense review and approval process and the tracking and 

monitoring of Transaction Fees. 
 

21. WL Ross also implemented new controls concerning the review and approval of 

expense reimbursements and fee offsets. In December 2014, WL Ross revised the Expense 

Processing and Allocation Policy it had adopted in 2011. Under the revised policy, management 

fee calculations as well as Transaction Fees from portfolio investments and related fee offset 

calculations must be reviewed and approved by the Chief Financial Officer and the Expense 

Review Group, a new group comprised of senior management, the Chief Financial Officer, and 

legal and compliance representatives, to ensure appropriate allocations and compliance with the 

relevant fund offering documents and agreements. 
 

VIOLATIONS 
 

22. As a result of the conduct described above, WL Ross violated Section 206(2) of 

the Advisers Act, which prohibits an investment adviser, directly or indirectly, from engaging “in 

any transaction, practice, or course of business which operates as a fraud or deceit upon any 

client or prospective client.” A violation of Section 206(2) may rest on a finding of simple 

negligence. SEC v. Steadman, 967 F.2d 636, 643 n.5 (D.C. Cir. 1999) (citing SEC v. Capital 

Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963)). Proof of scienter is not required to 

establish a violation of Section 206(2) of the Advisers Act.  Id.  



 

 

7 

 

 

23. As a result of the conduct described above, WL Ross violated Section 206(4) of 

the Advisers Act and Rule 206(4)-8 thereunder, which make it unlawful for any investment 

adviser to a pooled investment vehicle to “[m]ake any untrue statement of a material fact or omit 

to state a material fact necessary to make the statements made, in the light of the circumstances 

under which they were made, not misleading, to any investor or prospective investor in the 

pooled investment vehicle,” or “engage in any act, practice, or course of business that is 

fraudulent, deceptive or manipulative with respect to any investor or prospective investor in the 

pooled investment vehicle.”  A violation of Section 206(4) and the rules thereunder does not 

require scienter.  Steadman, 967 F.2d at 647. 

 

WL  ROSS ’ COOPERATION AND REMEDIAL EFFORTS 
 

24. In determining to accept the Offer, the Commission considered remedial acts 

promptly undertaken by WL Ross and cooperation afforded the Commission staff, including WL 

Ross’ self-reporting of the Transaction Fee allocation issue to the OCIE staff, WL Ross’ 

voluntary determination to revise its fee allocation methodology, and WL Ross’ voluntary 

reimbursement, with interest, of $11,873,571 in management fee credits resulting from its 

retroactive application of the revised allocation methodology to the inception of the WLR Funds. 
 

IV. 
 

In view of the foregoing, the Commission deems it appropriate to impose the sanctions 

agreed to in Respondent’s Offer: 

Accordingly, pursuant to Section 203(k) of the Advisers Act, it is hereby ORDERED 

that:  

A. Respondent shall cease and desist from committing or causing any violations and 

any future violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 

thereunder. 

B. Respondent shall, within ten (10) days of entry of this Order, pay a civil money 

penalty in the amount of $2.3 million to the Securities and Exchange Commission for transfer to 

the general fund of the United States Treasury, subject to Section 21F(g)(3) of the Securities 

Exchange Act of 1934.  If timely payment is not made, additional interest shall accrue pursuant 

to 31 U.S.C. §3717.  Payment must be made in one of the following ways: 

 

(1) Respondent may transmit payment electronically to the Commission, 

which will provide detailed ACH transfer/Fedwire instructions upon 

request; 

 

(2) Respondent may make direct payment from a bank account via Pay.gov 

through the SEC website at http://www.sec.gov/about/offices/ofm.htm; 

or 

 



 

 

8 

 

(3) Respondent may pay by certified check, bank cashier’s check, or United 

States postal money order, made payable to the Securities and Exchange 

Commission and hand-delivered or mailed to: 

 

Enterprise Services Center  

Accounts Receivable Branch  

HQ Bldg., Room 181, AMZ-341 

6500 South MacArthur Boulevard  

Oklahoma City, OK 73169 
 

Payments by check or money order must be accompanied by a cover letter identifying 

WL Ross as a Respondent in these proceedings, and the file number of these proceedings; a copy 

of the cover letter and check or money order must be sent to Panayiota K. Bougiamas, Assistant 

Regional Director, Asset Management Unit, Division of Enforcement, Securities and Exchange 

Commission, Brookfield Place, 200 Vesey Street, Suite 400, New York, NY 10281. 
 
By the Commission. 
 
 
 
 

Brent J. Fields  

Secretary