Private Equity Firm to Pay $2.3 Million for Misallocating Portfolio Company Expenses
A private equity firm agreed to pay over $2.3 Million in penalties, disgorgement and interest for failing to properly allocate portfolio company administrative expenses. The SEC asserts that the respondent, which registered in 2012 due to Dodd-Frank, purchased the portfolio companies in 1997 and 2001, held them in two separate funds, but integrated their operations as a prelude to selling the two companies in one package. The SEC alleges that from 2005 to 2013 one company paid more than its fair share of the 401(k) administration services and certain employee expenses. According to the SEC, this resulted in a breach of fiduciary duty to the fund that held the company that paid too much, even though the SEC acknowledges that the financial statements disclosed the payments. The SEC also charges the firm with violating the compliance rule (206(4)-7) because the firm failed to have policies and procedures designed to prevent the misallocation.
OUR TAKE: The SEC is sending several warnings to private fund sponsors: (1) we will closely review portfolio company expenses; (2) we will review transactions that occurred before you were registered; (3) we will impose severe financial penalties for missteps; and (4) get you compliance policies and procedures in order.