Somewhat more reminiscent of the broken-windows enforcement era, two affiliated private equity advisers managing billions settled with the SEC on charges that they failed to make pre-commitment disclosures in fund governing documents related to accelerated fees received from portfolio companies.
Interestingly, according to the Settlement Order, the advisers had made some disclosures in fund documents about receipt of fees from portfolio companies; they had provided semi-annual financial reports to investors which gave the amount of accelerated fees; they had disclosed in Form ADV that they may receive accelerated fees; and they had shared the earnings with investors. The SEC focused on the lack of pre-commitment disclosures. The Order notes, without stating if this could have cured the violation, that the advisers did not consult the Limited Partner Advisory Committee, or seek the review and approval of the LPAC for receiving accelerated fees.
As a result of this practice of receiving accelerated fees without adequate pre-commitment disclosure, according to the Order, the advisers negligently violated Advisers Act Section 206(2) (fraud), Section 206(4) and Rule 206(4)-8 (obligations to investors), and Rule 206(4)-7 (the compliance program rule).
This case signals the SEC’s laser focus on fund document language and the timing of disclosures. Avoid Enforcement through clear and conspicuous language in your fund documents, or contact us to help you work through remedial steps.