Private Equity Fund Adviser Settles SEC Charges for Improperly Offsetting Fees
Commentary by Dorothy Mehta
A private equity fund adviser settled SEC charges for (i) improperly offsetting portfolio company fees against management fees charged to clients and (ii) failing to clarify management fee calculations to clients. According to the SEC, these violations resulted in millions of dollars of overpayment to the investment adviser.
In its Order, the SEC found that the investment adviser distributed offering documents, which inconsistently described plans to offset fees, resulting in failed reimbursements as a result of a deficient compliance program. The SEC determined that these acts violated Sections 206(2) and 206(4) ("Prohibited Transactions by Investment Advisers") of the Investment Advisers Act, as well as Rules 206(4)-7 ("Compliance Procedures and Practices") and 206(4)-8 ("Pooled Investment Vehicles") thereunder. The SEC censured the investment adviser and ordered a $4.5 million civil penalty under the terms of the settlement.
Commentary
Private fund managers take note (AGAIN): disclosures regarding fees need to be 100% accurate. In this instance, offering documents disclosed an offset for management fees against portfolio company fees. And not only did the fund manager not offset those fees, but the SEC also cited emails in which fund manager personnel responded to certain investors that there was an offset and to other investors that there was no offset. This also speaks to the importance of effective policies and procedures in the calculation methodology for fees, as well as the training and supervision of employee personnel.