On June 17, 2015, the SEC settled enforcement proceedings brought against the investment adviser, administrator and the interested trustees of the World Funds Trust (“WFT”) and World Funds, Inc. (“WFI”), and the independent board members of WFT, based on numerous alleged violations of Section 15(c) of the 1940 Act. As part of the required advisory contract renewal process, Section 15(c) imposes a duty on directors to request and evaluate, and a duty on the adviser to furnish, such information as may reasonably be necessary to evaluate the terms of advisory contracts. According to the settlement order, the trustees of WFT and WFI, with the assistance of independent counsel, requested that the adviser and subadvisers provide certain materials and information in advance of the board meetings at which the contracts in question were to be considered. Among other things, the trustees requested that the adviser complete a questionnaire prepared by independent counsel that contained numerous questions about the adviser’s and subadvisers’ operations, compensation and compliance procedures. The questionnaire also requested information regarding fees paid by comparable funds.
In the settlement order, the SEC cited numerous deficiencies in the information provided by the adviser in connection with the Section 15(c) process. With respect to the contracts approved for WFT funds, the SEC found that the adviser did not provide any information regarding the fees paid by comparable funds, and provided only limited, unclear information regarding the nature and extent of the services to be provided by the adviser compared to the services that would be provided by subadvisers. Significantly, the SEC noted that the WFT funds did not pay any advisory fees, and the adviser reimbursed the majority of the operating expenses incurred by the WFT funds during the relevant period. Nevertheless, the SEC states that the trustees were still obligated to evaluate the adviser’s services as compared to the fees provided for in the advisory contracts.
With regard to the contracts for WFI funds, the adviser used a standard industry database to provide fee information for share classes that were comparable in size to WFI funds’ class A shares and that had an investment strategy that was comparable to the WFI funds. The SEC was critical of this information for various reasons, including the fact that it contained information pertaining to share classes of funds that were not directly comparable to WFI funds’ class A shares. The adviser also provided two additional charts that contained comparative fee and expense information. Again, the SEC found this information to be inadequate for various reasons, including the fact that the information failed to take account of differences in the expenses of different types of share classes and fee structures. The SEC also found that other materials provided by the adviser were deficient on several grounds, including the failure of the adviser to provide a description of the basis and methodology for allocating indirect costs, overhead, and other costs to WFI funds for purposes of estimating profitability, and the inclusion of erroneous information regarding fee waivers and breakpoints.
As a result of these deficiencies, the SEC determined that the adviser did not provide all the necessary information requested by the boards of WFT and WFI in connection with the Section 15(c) process. Further, the SEC found that the trustees of WFT violated Section 15(c) because they did not follow up to obtain the requested information and approved the initial advisory contracts for the WFT funds without having all the information they requested as reasonably necessary to evaluate the terms of advisory contracts. In settlement of these alleged violations, the two independent trustees of WFT and one interested trustee (who was an the owner of the adviser) each agreed to pay a civil monetary penalty of $3,250, and the adviser, the administrator and the interested director (who was the owner of the adviser) agreed to pay a joint civil monetary penalty of $50,000.