Private Equity Firm to Pay $39 Million for Inadequate Fee Disclosures 

A large private equity firm agreed to pay nearly $39 Million in disgorgement and fines for failing to disclose accelerated portfolio monitoring fees and taking advantage of legal fee discounts.  The SEC alleges that the respondent accelerated portfolio monitoring fees following the sale or IPO of a portfolio company without the required disclosure and consent.  Although the firm disclosed that it would receive portfolio monitoring fees in the PPMs and LPAs and disclosed the accelerated fees after receipt (which was subject to rejection by the Limited Partners committee), the SEC asserts that the firm engaged in an unlawful conflict of interest by failing to fully disclose (and obtain consent to) the accelerated fees before receipt.  The SEC also asserts that the firm benefitted from legal fee discounts that did not similarly benefit fund investors. The SEC charges that the firm breached its fiduciary duty and failed to implement necessary compliance policies and procedures.

OUR TAKE: This is the type of technical enforcement action that the industry fears.  The respondent disclosed the monitoring fees both before and after receipt.  The crux of the SEC’s charge is that the firm didn’t specifically disclose the acceleration of the monitoring fees upon a sale/IPO event.  Rather than simply accept the firm’s self-correction for future funds, the SEC imposed $39 Million in disgorgement and fines.  We recommend that every SEC registrant undergo a mock audit and implement a state-of-the-art compliance program including a Chief Compliance Officer with direct Advisers Act experience.  It will cost a lot less than $39 Million.