Under the new administration with Chair Paul Atkins, investment adviser fees and undisclosed conflicts of interest are proving to be an area of priority. On June 2, 2025, the U.S. Securities and Exchange Commission (“SEC”) charged New Line Capital LLC (“New Line”), and its managing member, David A. Nagler (“Nagler”), for breaching its fiduciary duties and defrauding clients (the “Nagler Case”) under the Investment Advisers Act of 1940 (“Advisers Act”). These claims come as a result of contradictory and misleading language regarding management fees. Notably, these claims are brought against a smaller investment adviser with only around $30,000,000 assets under management (“AUM”).
Overview of the Charges
The Nagler Case complaint alleges two main issues: (i) advisory fees were higher than disclosed, and (ii) material conflicts of interest were hidden. First, Nagler and New Line told clients that they would never pay advisory fees exceeding 2% of AUM. However, allegedly, many clients paid more. Second, material conflicts are alleged to have been hidden due to Nagler’s practice of charging additional fees on a discretionary basis without first obtaining client approval. As argued by the SEC, Nagler and New Line owed fiduciary duties to New Line clients as an investment adviser. Such duties require Nagler and New Line to act in their clients’ best interest, employ reasonable care to avoid misleading, and disclosure of all material facts.
Fee Disclosures
Fee disclosures in the investment advisory agreement (the “Advisory Agreement”) pertained to annual fees and hourly fees. Schedule B of the Advisory Agreement included a table providing that the management fee would be between 1% and 1.5% depending on the total assets under management, along with a disclosure stating that “Client acknowledges that it is understood and agreed that the account is subject to a minimum annual fee of $10,000.” Brochures contained a disclosure stating that:
“Fees quoted are annual and charged quarterly in advance, although with the client and adviser’s consent, fees may be charged in arrears. We also typically charge a minimum of $10,000, though this minimum may be negotiable at our discretion. At inception, an initial partial calendar quarter and the next full calendar quarter fees may be charged. After the first full quarter’s fees are paid, subsequent quarterly fees may reflect a proportional amount of the $10,000 minimum annual fee. Regarding our minimum fee, we take care to assure that our standard advisory fee does not compute to be greater than 2% per annum.”
According to the SEC complaint, Nagler and New Line charged clients in excess of 2% by charging the full $10,000 amount even to clients with smaller amounts under management. In addition, Nagler allegedly determined the amount of advisory fees by applying subjective factors.
Furthermore, New Line brochures included hourly consultation fees at $250 per hour with a minimum retainer of 6 hours per quarter. However, these hourly fees were not included in advisory agreements or any other agreement signed by New Line clients. Allegedly, many clients were unaware of these fees or the full extent of these fees.
These allegations led the SEC to claim that Nagler and New Line hid material conflicts from clients by failing to disclose the practice of charging additional fees on a discretionary basis without client approval as well as that they breached fiduciary duties by failing to disclose all material facts.
Takeaways
While the outcome of this case will be at the hands of future litigation proceedings, this case serves as a caution to investment advisers and potentially even exempt advisers.
First, New Line and Nagler were relatively small investment advisers with only around $30 million AUM. Despite being a smaller investment adviser, the SEC still determined to pursue an enforcement action against them. This serves as a caution to investment advisers, and even exempt advisers, to be diligent in ensuring compliance and fully disclosing any and all fees.
Second, investment advisers, and exempt advisers, should exercise caution in the language of their fee disclosures. While New Line and Nagler disclosed their fees, the SEC found the disclosures to be insufficient and misleading. Investment advisers and exempt advisers must be very clear about all fees they will charge, how those fees will be calculated, and how additional fees may be added or waived. Furthermore, investment advisers and exempt advisers should ensure that all potential advertising material or correspondence align with agreements provided to clients or investors. As processes or procedures change overtime, investment advisers and exempt advisers should ensure that they obtain necessary consents to charge additional fees.
Third, shortly after Atkins took office, the Transamerica case was filed which also alleges conflicts of interest and breaches of fiduciary duties under the Advisers Act. Looking at the Transamerica case in conjunction with the Nagler Case, it appears that the SEC is prioritizing these issues. As such, it’s important for investment advisers and exempt advisers to ensure full disclosure of fees and potential conflicts of interest.
For any specific questions regarding fee disclosures or assistance with preparing compliant fee disclosures, please contact our team.