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Do You Have the Proper Disclosures in your Documents?

Saturday, October 24, 2015

Full transparency of fees and potential conflicts of interest are critical in the private equity industry. The Securities and Exchange Commission (“SEC”) recently announced that as a result of their investigation of three private equity fund advisers with The Blackstone Group, they found that the advisors failed to adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies prior to the companies’ sale or initial public offering.  The SEC investigation also found that fund investors were not informed about a separate fee arrangement that provided Blackstone with a much greater discount on services by an outside law firm than the discount that the law firm provided to the funds.

The Blackstone Group agreed to pay nearly $39 million to settle charges that it breached its fiduciary duty to the funds, failed to properly disclose information to the funds’ investors, and failed to adopt and implement reasonably designed policies and procedures.  Nearly $29 million of the settlement will be distributed to affected fund investors.

Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, has maintained, “We will continue taking action against advisers that do not adequately disclose their fees and expenses, as Blackstone did here.”

“As the beneficiary of the accelerated monitoring fees, Blackstone violated its fiduciary duty by failing to properly disclose the fees,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Blackstone further breached its fiduciary duty by choosing to negotiate a legal fee arrangement with greater benefits for itself than the funds it advised, without properly disclosing the arrangement.”

The Division of Enforcement’s Asset Management Unit is continuing its review of private equity fee and expense issues and encourages private equity fund advisers that have identified such issues to self-report them to the staff.  Self-reporting is a very important factor that the Commission considers when evaluating cooperation and determining whether and to what extent to extend credit in settlements.

Have questions about what should be disclosed, let Red Oak help you navigate the murky waters.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.

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