Today, June 14th, the SEC announced that they charged a Private Equity Adviser with allocating undisclosed, disproportionate expenses to a private equity fund it advises.
As a result of this charge, the Adviser agreed to pay a $1 million penalty to settle the SEC charges, and has voluntarily paid back more than $3.3 million to the fund.
How Did The Issue Occur?
- There was an investment partnership by the Adviser to acquire the stock of a public company in what is referred to as a take-private transaction.
- The Adviser agreed that third-party co-investors would not have to bear expenses related to a credit facility used to finance the transaction, which closed in March 2018.
- A disproportionate share of these expenses were allocated to a private equity fund it advised without disclosure, according to the SEC’s order.
- Written compliance policies and procedures were not implemented and designed by the Adviser to prevent violations of the Advisers Act.
- These expenses should have been either disclosed or not allocated in this manner under the fund’s organizational documents, according to the SEC’s order.
What Were The Findings And Final Conclusion?
- Adam S. Aderton, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, focused on investor protection in his statement, where he made note of the importance that investors are not to pay more in expenses or fees than they bargained for and that Private Equity Advisers must follow their own agreements.
- He further commented about the SEC continuing to focus on co-investor issues and misconduct in the private fund space as a whole. The investors ended up getting paid back, which ensured the resolution to this issue.
- The final conclusion was that this $1 million charge resulted in a violation of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 and 206(4)-8.
Vigilant’s Final Conclusion
As we have stated throughout the year, the SEC is fully focused on protecting investors in 2022, and this was highlighted by Co-Chief of the SEC’s Division of Enforcement in the statement he made.
This case and preceding similar cases, should be a reminder to Private Equity Firms that the SEC remains focused on (1) Accurate Disclosure to investors and the public, (2) allocation of expenses, (3) co-investments, (4) preferential treatment to certain LPs, and (5) compliance policies and procedures.
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