On April 21, 2015, the SEC settled an action brought against an investment adviser, Kornitzer Capital Management, Inc. (“KCM”), and Barry E. Koster (“Koster”), KCM’s CFO and CCO, for allegedly furnishing inaccurate and incomplete information to the board of the Buffalo Funds in connection with the advisory contract renewal process conducted pursuant to Section 15(c) of the 1940 Act. The settlement order asserts that, in connection with the advisory contract review process, the Buffalo Funds’ board requested an analysis of KCM’s profitability in managing the Buffalo Funds, including an explanation of KCM’s expense allocation methodology. In response to that request, Koster, acting on behalf of KCM, prepared and provided to the board the requested analysis and explanation of KCM’s expense allocation methodology, which specifically represented that KCM allocated all employee compensation expenses to the Funds “based on estimated labor hours.” In fact, the settlement order alleges that Koster adjusted the allocation of the compensation of KCM’s CEO to the funds in a manner designed, in part, to achieve year-over-year consistency of KCM’s reported profitability in managing the Buffalo Funds. Koster did not disclose this information to the board.
The SEC found that KCM’s failure to disclose the allocation methodology was a violation of Section 15(c), and that Koster caused the violation by KCM. Without admitting or denying fault, KCM and Koster agreed to cease and desist from future violations of Section 15(c) and to pay to the SEC civil penalties of $50,000 and $25,000, respectively.