SEC Charges Private Equity Fund Adviser with Misallocation of Portfolio Company Expenses (with Lofchie Comment)

The SEC charged an investment advisory firm with breaching its fiduciary duty to a pair of private equity funds by sharing expenses between a company in one's portfolio and a company in the other's portfolio in a manner that improperly benefited one fund over the other.

The adviser had integrated the two portfolio companies and managed them as one, even though the funds were separately advised and had distinct sets of investors. The Order found that one fund paid more than its fair share of joint expenses that benefited both funds, and that the adviser failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act arising from the integration of the two portfolio companies.

Lofchie Comment: The enforcement action did not specify how expenses ought to have been shared between the two funds. Rather, the enforcement action was based on the fact that, in some situations, there was no written expense allocation plan and, in other cases, any planned written expense allocation was ignored.

See: SEC Order; SEC Press Release.