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PE Firm Pays Over $1.6 Million for Improper Expense Allocation

A private equity fund has agreed to pay over $1.6 Million in fines and client reimbursement for mis-allocating expenses to its fund.  The SEC charges that the PE firm unlawfully charged legal, hiring, and employee and consulting expenses to the fund.  The SEC interprets the organizational documents as only permitting “normal operating expenses,” including “all routine, recurring expenses incident to” their own operations.  The SEC faults the firm for failing to adopt and implement appropriate compliance procedures including multiple levels of expense review, escalation procedures and oversight.

OUR TAKE: PE firms continue to struggle with expense allocation issues, failing to understand that a fiduciary cannot use a managed fund as a piggy bank to pay firm expenses.  Proper compliance procedures should prevent firms from crossing the fiduciary line.


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