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Private Equity Firm Owned by Large Institutional Manager Fined $2.3 Million

private equity expenses

A private equity firm owned by a large investment manager agreed to pay $2.3 Million to settle charges that it mis-allocated transaction fee offsets in order to collect more management fees.  The respondent also voluntarily agreed to reimburse investors over $11.8 Million.  The funds’ LPAs and disclosure documents required an offset of management fees by a portion of transaction fees received for services related to portfolio companies.  The SEC alleges that, over a 10-year period, the firm failed to disclose that it would allocate a portion of the transaction fees to co-investors, thereby reducing the offset.  The firm itself discovered the mis-allocation during an SEC exam and self-reported.  As part of its remediation efforts, the respondent replaced its Chief Compliance Officer, engaged an independent auditor to perform an internal review, and implemented fee review procedures.

OUR TAKE: The Advisers Act’s fiduciary standard is a much higher standard of care than the 10b-5 standard applicable to private equity funds before Dodd-Frank.  A practice that might not have been “material” to an investor’s initial investment decision could still violate the Advisers Act’s more stringent disclosure and fiduciary requirements when the fund sponsor (adviser) benefits financially to the detriment of investors (clients).

https://www.sec.gov/litigation/admin/2016/ia-4494.pdf