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A U.S. venture capital fund manager misled investors about its compensation model by claiming to follow an industry standard when it actually deviated significantly from conventional practices, regulators alleged.

The Securities and Exchange Commission (SEC) settled charges against venture fund manager Alumni Ventures Group LLC (AVG), which agreed to repay US$4.7 million to its funds, along with a US$700,000 penalty. The firm’s CEO also agreed to a US$100,00 penalty.

According to the SEC, the firm claimed that its funds charged investors an “industry standard 2 and 20” — which misled investors into thinking that the funds charged fees in line with a model that’s often used by private funds that levy an annual 2% management fee and a 20% performance fee. In fact, the SEC says, the firm collected 20% of investors’ initial investment, representing 10 years of 2% fees.

“AVG’s practices in assessing its management fees were inconsistent with what a reasonable investor would understand, absent additional disclosure, from AVG’s use of the term ‘industry standard’,” the SEC said in its order.

The regulator noted that multiple investors complained when they discovered the firm’s actual approach to fees, but that it “continued to use the “industry standard ‘2 and 20’” language even after receiving complaints from investors who learned that their capital contributions were reduced by multiple years’ worth of management fees before being deployed to investment opportunities.”

The SEC said that the firm’s CEO approved of the “industry standard” language, “even though he was unaware of any other adviser in the industry that collected the entirety of multiple years’ worth of management fees at the time of the fund investor’s initial investment.”

It also said that he “unreasonably believed” that the claim was accurate “notwithstanding the complaints that AVG received from investors, and in the face of questions about the language that were raised to him in 2017 by an AVG board member and an AVG officer.”

Both the firm and its CEO consented to the SEC’s order, without admitting or denying the SEC’s findings. They also agreed to a cease-and-desist order, and AVG agreed to a censure.

“Venture capital fund advisers, like all advisers to funds, must accurately describe their fees and abide by the funds’ agreements,” said Adam Aderton, co-chief of the SEC enforcement division’s asset management unit, in a release.