Private Equity Firm Will Pay $28 Million to Settle Expense Allocation Charges
A large private equity firm agreed to pay over $28 Million in disgorgement, penalties and interest for failing to allocate broken deal expenses to co-investing funds created for “its executives, certain consultants and others.” According to the SEC, from 2006-2011, the respondent did not allocate to these funds broken deal expenses including research costs, travel costs, professional fees, and other expenses relating to deal sourcing. Although the Limited Partnership Agreement permitted the allocation of broken deal expenses to the client fund, the SEC faults the firm because neither the LPA nor any other disclosure document informed clients that the respondent would not allocate broken deal expenses to the co-investing funds. The SEC also charges that the firm failed to implement an adequate compliance program because it did not have reasonable policies and procedures related to the allocation of broken deal expenses. Although the firm did not register until 2008, the SEC disgorgement includes fee allocations that occurred back to 2006.
OUR TAKE: This case should receive significant attention because of the size of the monetary sanctions, the scrutiny of internal expenses, the failure to implement an adequate compliance program, and the review of activities that occurred before the firm registered. Private equity firms must take action now to prepare for SEC scrutiny of all current and past operations and practices.