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PE Firm Fined $3.5 Million and Reimburses Clients over $8 Million

conflicts of interest

The SEC fined a private equity firm $3.5 Million for engaging in several prohibited conflicts of interest.  The respondent also voluntarily agreed to reimburse investors over $8 Million.  The SEC alleges that the firm, without disclosure or approval of the LP advisory board, created a structure whereby fund investors paid organizational and operating expenses incurred in the creation of advisory affiliates.  The SEC also accuses the fund manager with allocating a disproportionate share of insurance policy premiums to the funds and for benefitting from legal fee discounts.  The SEC asserts that the firm’s failed compliance program allowed the conflicts to continue.  The firm reimbursed investors following discovery of the conflicts during an SEC exam.

OUR TAKE: Reimbursing investors after the SEC staff accuses your firm of wrongdoing won’t avoid an enforcement action or fines.  Private equity firms must implement a robust compliance program that proactively uncovers, reports, and remedies conflicts of interest

https://www.sec.gov/litigation/admin/2016/ia-4529.pdf