Private Equity Infrastructure RIA Charged for Breach of Duty
SEC Releases
Brief Introduction
Recently, the SEC charged a Private Equity Registered Investment Adviser (“RIA”) more than $1.6 Million for failures involving their fiduciary duty to Funds being managed.
The RIA advises Private Funds that invest in infrastructure and real property-based assets and businesses.
This most recent case brings attention to the SEC’s stated goal of keeping Private Fund Advisers accountable to act in their client’s best interest.
What Happened?
According to the SEC:
- The Firm received accelerated fees that violated fiduciary duty.
- The Firm routinely entered into monitoring agreements with the portfolio companies invested in by their advised Funds.
- The Firm entered into an amended portfolio agreement allowing for accelerated monitoring fees if the management contract ended prematurely, without notifying their Fund that the agreement occurred, and then sold the portfolio company almost eighteen months later.
- This conflict of interest was not properly disclosed, and the Firm failed to properly consider if this accelerated fee agreement was in their fund’s best interest.
- The Firm transferred Fund assets in a clear conflict of interest.
- As the ten-year term of one of the Firm’s managed Funds was close to expiring, the Firm transferred their assets into a different Fund also managed by the Firm, which locked these assets for another eleven years.
- The original Fund’s investors were given no opportunity to object or exit the investment.
- The Firm also received additional compensation as a result of the transferred assets from one Fund to another.
- The Firm allowed one of its Funds to incur expenses related to the business operations of another Fund; even though the fees were reimbursed, the transaction was essentially an unapproved loan at the expense of the original Fund.
Vigilant’s Conclusion
According to the SEC:
- The Firm received accelerated fees that violated fiduciary duty.
- The Firm routinely entered into monitoring agreements with the portfolio companies invested in by their advised Funds.
- The Firm entered into an amended portfolio agreement allowing for accelerated monitoring fees if the management contract ended prematurely, without notifying their Fund that the agreement occurred, and then sold the portfolio company almost eighteen months later.
- This conflict of interest was not properly disclosed, and the Firm failed to properly consider if this accelerated fee agreement was in their fund’s best interest.
- The Firm transferred Fund assets in a clear conflict of interest.
- As the ten-year term of one of the Firm’s managed Funds was close to expiring, the Firm transferred their assets into a different Fund also managed by the Firm, which locked these assets for another eleven years.
- The original Fund’s investors were given no opportunity to object or exit the investment.
- The Firm also received additional compensation as a result of the transferred assets from one Fund to another.
- The Firm allowed one of its Funds to incur expenses related to the business operations of another Fund; even though the fees were reimbursed, the transaction was essentially an unapproved loan at the expense of the original Fund.