Inadequate Compliance Program Brings Down PE Firm
A private equity fund manager agreed to a fine and censure and will ultimately wind up its operations as a result of compliance failures including allocating overhead expenses to its funds without disclosure. According to the SEC, the fund’s offering documents and Management Agreement indicated that the fund manager would bear its own expenses. However, the respondent allocated compliance consulting expenses to the fund “in a manner that was not disclosed in the Fund’s organizational documents.” The respondent also allocated other overhead expenses including office supplies, computers, and utilities. The SEC charges the firm with failing to implement an adequate compliance program, including failing to follow certain procedures governing valuation and Code of Ethics reporting.
OUR TAKE: The SEC’s campaign against the private equity industry continues with yet another enforcement action involving failure to implement an adequate compliance program. However, the SEC still has not closed the door on charging compliance expenses to the funds if properly disclosed. The open question is how much disclosure will satisfy the SEC?