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The Hunt Continues: SEC Goes After Large Private Equity Firm for Undisclosed Fees

On October 7, 2015, the SEC announced a large settlement with a private equity firm charged with failure to disclose. The SEC said that the firm failed to sufficiently disclose to its investors details about fees they collected from companies it sold or took public, as well as discounts the firm received on some legal fees that weren't passed on to the fund investors. Nearly $29 million of the settlement will be distributed to affected fund investors, the SEC said. The SEC alleged that the firm breached its fiduciary duty and failed to implement necessary compliance policies and procedures to mitigate the risk of conflicts of interest.

The SEC noted in their proceeding that some investments made by the firm from 2010 to 2015 resulted in "accelerated" monitoring fees that weren't disclosed to clients when they initially committed capital to the funds. Monitoring fees, which private equity firms charge annually for advisory work to companies they own, were "accelerated" into lump-sum payments to the firm when they sold or took a business public ahead of schedule, even when future work wouldn't be performed. The SEC alleged that this practice lowered the value of the portfolio companies, reducing potential profits available for limited partners and has criticized these actions in the past as so-called "hidden fees" that are often paid by investors.

The SEC said in this case that the firm had, in most instances, only taken the fees while maintaining some ownership stake in the company, but that in a few instances it took fees for a period time for which it no longer had a stake in the company.

In addition to the monitoring fees, the SEC also felt that the firm's relationship with their lawyers created a fundamental conflict. Between 2008 and 2011, the SEC alleges the firm had an agreement with its law firm under which it received a discount on legal services that was "substantially greater" than the discount the funds received, but the difference wasn't disclosed to the fund investors.

SEC Enforcement Director Andrew Ceresney noted when announcing the settlement that the Commission's "clear message to the entire private-equity industry is that this is an area of great risk, and that whatever the success of the fund over time, hidden or inadequately disclosed fees will not be tolerated regardless of the size of the adviser."

The settlement follows another agreement between the SEC and a private equity firm in June 2015 in which the firm involved paid almost $30 million to settle SEC charges that it improperly allocated more than $17 million in expenses, hurting some investors while benefiting the firm's executives and certain clients.

Our Perspective:

The SEC is continuing to focus on the private equity space, and taking aim at fees and expenses, as outlined in the Commission's 2015 examination priorities. As we see here, even firms with expansive compliance programs and strong controls can find themselves with regulatory grief.  This seems to absolutely support the argument that more is better when it comes to disclosure.  Advisers and their CCOs in this space are well advised to implement a plan for reviewing and testing fees and disclosure in detail. Ask good questions and be proactive.

SEC3 can assist your firm in creating, implementing and maintaining your policies and procedures. SEC3 can also test your compliance program to identify weaknesses. For further information, please contact your SEC3 representative or contact us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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