Full Disclosure of Portfolio Company Fee and Payment Arrangements May Reduce Risk of Conflicts and Enforcement Action

“Private equity advisers must be particularly vigilant about conflicts of interest and disclosure when entering into arrangements with affiliates that benefit them at the expense of their fund clients or when receiving payments from portfolio companies,” warned SEC enforcement director Andrew J. Ceresney in a press release announcing the SEC’s recent settlement with an investment adviser.  The SEC charged that the investment adviser and its principals failed to disclose conflicts of interest to clients and made statements to investors that omitted material information regarding consulting payments to an affiliate and incentive payments to certain adviser employees from a private equity portfolio company.  This article summarizes the facts underlying the enforcement proceeding, the SEC’s specific charges and the sanctions imposed.  For more on conflicts of interest involving fee and expense allocations, see “Blackstone Settles SEC Charges Over Undisclosed Fee Practices,” Hedge Fund Law Report, Vol. 8, No. 41 (Oct. 22, 2015); “RCA Panel Highlights Conflicts of Interest Affecting Fund Managers,” Hedge Fund Law Report, Vol. 8, No. 26 (Jul. 2, 2015); and “SEC Enforcement Action Involving ‘Broken Deal’ Expenses Emphasizes the Importance of Proper Allocation and Disclosure,” Hedge Fund Law Report, Vol. 8, No. 27 (Jul. 9, 2015).  For ways to address and mitigate potential conflicts, see “Recommended Actions for Hedge Fund Managers in Light of SEC Enforcement Trends,” Hedge Fund Law Report, Vol. 8, No. 41 (Oct. 22, 2015).

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