PE Firm Will Pay $10 Million for Failing to Disclose Related Party Consulting Contracts
A private equity firm and its four principals, including its CFO/CCO, agreed to pay over $10 Million in disgorgement, interest, and fines for failing to disclose related party consulting arrangements. According to the SEC, the respondents executed consulting agreements with portfolio companies for the payment of monitoring fees. The consulting agreements replaced similar agreements whereby the related investment adviser received the monitoring fees but agreed to offset these payments against the advisory fees. The new consulting agreements did not require any offsets. The SEC charges that the firm misled the LP Advisory Board as well as the auditors. The SEC faulted the CFO/CCO for facilitating the transactions, which included signing the consulting agreements.
OUR TAKE: Registered private equity firms must understand that the fiduciary duty requires putting your clients’ interests first, including an obligation of full disclosure of fees. Firms must reject the culture of opacity that predated Dodd-Frank. In this case, it is an interesting hypothetical question whether the LPs would have even objected to the consulting agreements had they known. Also, it is a CCO’s job to identify conflicts of interest, not to facilitate them.