Adviser Settles SEC Charges for Misallocating Deal-related Expenses

An investment adviser settled SEC charges for disproportionately allocating undisclosed expenses to a private equity fund in connection with a take-private transaction.

According to the SEC Order, the adviser misallocated millions of dollars in expenses related to a credit facility providing bridge financing for a take-private transaction to acquire a power company. Without notifying or seeking consent from the fund's Limited Partner Advisory Committee, the adviser agreed to excuse certain co-investors from paying any of the credit facility-related expenses. The adviser passed the expenses to the fund, resulting in the fund bearing a disproportionate percentage of the fees relative to its ownership interest in the power company.

The SEC further found that the adviser failed to implement appropriate policies and procedures for expense allocation.

The adviser was found to have violated Sections 206(2) and 206(4) of the Advisers Act ("Prohibited transactions by investment advisers") as well as Advisers Act Rule 206(4)-7 ("Compliance procedures and practices") and Rule 206(4)-8 ("Pooled investment vehicles"). The adviser agreed to pay back over $3.3 million to the fund as well as a $1 million penalty.