The SEC fined and censured a private equity manager and its principals for unlawfully charging the fund both portfolio company expenses and adviser overhead expenses. The PE manager charged the fund certain consulting expenses provided to a portfolio company without offsetting the management fee as required by the LPA. The PE manager also charged overhead expenses including employee compensation, rent, and the costs of responding to the SEC examination/enforcement. The SEC charges that the expenses were not authorized in the fund’s organizational or disclosure documents. The SEC asserts violations of the Advisers Acts antifraud provisions as well as the compliance rule (206(4)-7) for failing to adopt and implement reasonable policies and procedures. As part of its remediation, the PE firm agreed to hire a new Chief Compliance Officer.
OUR TAKE: It really is better to build a legitimate compliance infrastructure before the SEC arrives rather than in response to an enforcement action. An ounce of compliance prevention can avoid the reputation-crushing havoc of an SEC enforcement action.