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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 a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

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