Private equity GPs get bolder in settlement negotiations with SEC

Private equity GPs have grown bolder in their negotiations with the SEC recently, working to pare down settlement agreements or choosing to delay settling until new leadership takes the reins at the agency, three sources told Buyouts in recent interviews.

Without providing specifics, two lawyers who work with PE firms on regulatory matters said they have seen this dynamic among investment advisers.

“There have been several advisers that have been emboldened and maybe not willing to settle for the same amounts they would have before,” said Nabil Sabki, a partner at Latham & Watkins.

And as the agency leadership transition continues, “it’s going to be very difficult for staff now … to bring novel or new enforcement cases,” Sabki said. He stressed this doesn’t mean the SEC is paralyzed; the agency continues to work on cases and bring them to settlement.

An adviser who works with institutional investors said the “big secret” is that several firms facing enforcement actions are delaying settling their cases with the SEC, waiting until a perhaps PE-friendlier regime is in place. President Donald Trump nominated Sullivan & Cromwell Partner Jay Clayton as chairman of the SEC, to succeed Mary Jo White.

Because of his work in the financial industry, Clayton may have to recuse himself from matters involving his firm’s clients. If Clayton is confirmed by the U.S. Senate, “everyone expects the commission will be less aggressive than the sort of ‘broken-window’ Mary Jo White regime,” Sabki said. (The reference is to a law-enforcement method of arrest for and prosecution of low-level quality-of-life violations to try to minimize the prospect of more serious crimes occurring.)

The Institutional Limited Partners Association, an industry trade group, does not want to see SEC scrutiny of the industry slacken. “The ILPA believes that predictability and consistency on the part of the SEC will help ensure that PE funds operate to the highest compliance standards,” Jennifer Choi, managing director for industry affairs at ILPA, said in a statement to Buyouts. “We encourage the incoming SEC leadership to continue their commitment to the high standards set to date.”

Making it tougher on SEC staff, the agency has only two out of five commissioners in place: Republican Michael Piwowar, acting chairman, and Democrat Kara Stein.

After an investigation, if staff believes it has a case, it brings its findings to the commission for its review. Commissioners can then authorize staff to file a case in federal court or bring an administrative action. Or at that point the adviser being probed can choose to settle with the agency.

Piwowar has dissented on recommended enforcement cases, including the SEC’s largest settlement with a PE firm, Apollo Global Management, last year. He also dissented last year on recommended enforcement action against WL Ross & Co and Blackstone Group in 2015, according to voting summaries published by the SEC.

The cases against Blackstone and Apollo included charges that the firms did not appropriately disclose their abilities to accelerate full payment of monitoring fees even when the firms exited monitoring contracts before they expired.

“If I were the staff and I had an [accelerated monitoring fee] case now, I’d be worried,” according to a second attorney who works with private equity firms. The attorney cited Piwowar’s dissenting opinions in several PE cases.

Noteworthy is that Piwowar voted to approve other private equity enforcement recommendations, including those against Kohlberg Kravis Roberts and Fenway Partners, according to the voting summary.

“People are in as good a position now as they’re going to be. Firms might be reading the tea leaves and see that Piwowar dissented against some of the enforcement recommendations in this space. Those firms are in a pretty good position,” the attorney said.

At this moment of transition, Piwowar controls the agenda, the attorney said. That’s not going to last if Clayton gets confirmed and the other commission vacancies are filled. But even then, the commission could be tilted toward those who aren’t necessarily supportive of PE enforcement.

“Staff has some hard thinking to do on these issues,” the attorney said.

Judith Burns, a spokeswoman for the SEC, declined to comment. Piwowar, through Burns, also declined comment.

Action Item: Check out SEC commissioners’ voting record here: https://www.sec.gov/foia/foia-votes.shtml

The U.S. Securities and Exchange Commission logo adorns an office door at headquarters in Washington on June 24, 2011. Photo courtesy Reuters/Jonathan Ernst