A U.S. district court judge criticized the U.S. Securities and Exchange Commission (SEC) for lax oversight of a plan to return monetary penalties to investors.

In a decision released Tuesday, US District Court judge, William Pauley III approved a distribution plan seeking to return US$25 million to investors as part of a settlement between the SEC and Zurich Financial Services, representing penalties which were levied against Zurich in an enforcement case.

The distribution had been held up over fees to be charged by the distribution plan administrator, Garden City Group, Inc. (GCG). Back in September 2011, the court said it found the fees and costs unjustified and the SEC’s oversight lacking. And it directed the SEC to justify the fees sought by GCG.

According to the judgement, an SEC review of the proposed fees uncovered a “discrepancy” in expenses, relating to an undisclosed 15% commission (worth US$77,953.27) being charged by GCG’s in-house ad agency. Following that revelation, the court directed GCG to file a renewed motion to distribute the funds, consistent with the SEC’s response.

“While acquiescence by the SEC to a fee application is usually accorded deference… this court cannot countenance the SEC’s go-along attitude here,” the decision says. “As administrator, GCG owes a duty to distribute the fund efficiently. Industry standard or not, the undisclosed commission to GCG amounted to a kickback.”

The court ruled today that it would allow US$403,537.50 in fees, but it denied an additional US$88,996.27 in fees that were unauthorized. It allowed GCG’s expenses of US$148,903.90, and granted the remainder of its distribution motion.

“Ultimately, the distribution to aggrieved investors in this action has been delayed for sixteen months because GCG and the SEC tethered fees and expenses to the distribution to aggrieved investors. The SEC has allowed its responsibility to conduct meaningful oversight to fall to this court,” the decision says.

In order to allow faster dissemination to investors in the future, “the SEC should create realistic fee and cost reserves and avoid tying distributions to the payment of fund administrators,” it says. Additionally, it says that the SEC should consider requiring fund administrators to certify that fees and expenses were reasonable, and that the SEC should certify to courts that all of the fees and expenses sought by a plan administrator were necessary and appropriate. “If the SEC is serious about compensating aggrieved investors, it should take a much harder look at the submissions of its fund administrators,” it says.