The SEC Wednesday announced that it had instituted settled enforcement proceedings against Bridgeway Capital Management and its president, John Noland Ryan Montgomery, in connection with more than $4.4 million in illegal performance-based fees that Bridgeway charged to three of its mutual funds. Bridgeway agreed to reimburse shareholders $4,407,700, plus prejudgment interest of $458,764 and pay penalties of $300,000. The SEC has also required the firm to hire experienced compliance personnel to ensure that Bridgeway applies its performance-based fee in accordance with the federal securities laws in the future.

According to the case, between July 1995 and this past March, Bridgeway charged investors fees based on the funds’ present value, rather than their trailing five-year average. Because funds’ current assets typically exceed a trailing period, this was an inappropriate manner in which to calculate performance fees, the SEC said.

"Mutual fund managers must ensure that advisory fees are assessed in strict accordance with the law," said Harold F. Degenhardt, administrator of the SEC’s Fort Worth, Texas, office. "This is particularly true with respect to performance-based fees, which must be a fair reflection of a fund’s performance during the entire performance period."

Bridgeway and Montgomery neither admitted nor denied the findings in the Commission's Order. In fact, Montgomery has recently come to the fore in cries for mutual fund reform and even received pats on the back from Morningstar for how "investor-friendly" his funds were. His funds have always been known as some of the most transparent on the market, and his company donates half of its profits to charity.

Although the fund industry scandal has dragged on for a while, Montgomery’s is the first case involving fees, which have become a hot issue.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.