Private Equity Firm Pays Over $3 Million for Multiple Compliance Violations
A private equity firm and its principal agreed to pay over $3 Million in disgorgement, penalties, and interest for violating several provisions of the Advisers Act and the Exchange Act including a failure to adopt compliance policies and procedures that could have prevented the violations. The SEC asserts that the respondent failed to register as a broker-dealer and thereby violated the Exchange Act when receiving investment banking and related transaction-based compensation in connection with the acquisition and disposition of portfolio companies. The SEC also charges the firm with violating the Advisers Act by collecting undisclosed and unapproved operating fees, misusing fund assets to pay unauthorized expenses, directly purchasing portfolio company interests from exiting limited partners, and waiving required capital calls. The SEC also faults the firm for failing to implement adequate policies and procedures around conflicts of interest, use of fund assets, fees, and redemptions.
OUR TAKE: Private equity firms registered as investment advisers must re-examine their business and compliance practices now that the SEC will scrutinize them with the fiduciary lens. Insider transactions, undisclosed fees, and sweetheart deals with certain LPs will not pass muster. PE firms also must hire a competent and experienced chief compliance officer to help navigate these choppy regulatory waters.