A private equity firm agreed to pay a $400,000 fine and reimburse clients for overcharging fund investors over a 16-year period. According to the SEC, the PE firm did not proportionally allocate broken deal, legal, consulting, insurance, and other expenses to co-investors and employee co-investment funds, thereby overcharging investors in their flagship funds. The SEC also accuses the firm of paying portfolio company consulting fees to co-investors, which resulted in lower fee offsets to the detriment of flagship fund investors. The firm voluntarily agreed to reimburse investors for the expenses and the fees following discovery of the misconduct during a 2016 SEC exam. The SEC charges the firm with failing to implement a reasonable compliance program as well as the Advisers Act’s antifraud rules.
If the firm had implemented a reasonable compliance program, discovered the overcharging, and reimbursed clients before the SEC uncovered the violations during an exam, it may have avoided the public enforcement action and resulting fine. Also, a reasonable compliance program may have avoided the overcharging in the first place. C-suite executives should re-think the cowboy mentality that ignores compliance until the SEC or a client makes them change. It’s much less expensive to change the oil every 5000 miles than to replace the engine if it seizes.