- Agency has no plans to let up
- Sponsors are being more transparent
- Management fee offsets have become more LP-friendly
“The unit’s priorities include conflicts of interest, valuations, and compliance in controls,” Julie Riewe, co-chief of the SEC’s Division of Enforcement within the Asset Management Unit, said Feb. 26 at IA Watch’s 17th Annual IA Compliance Conference. “On the private equity side, the unit continues to work very closely with exam staff and we expect to see more undisclosed and misallocated fee and expense cases.”
In a follow-up interview after her keynote address, Riewe told Buyouts that future enforcement would likely target activity of the same “flavor” as its cases against private equity firms Lincolnshire Management and Clean Energy Capital.
In September, Lincolnshire agreed to pay a $2.3 million settlement without admitting or denying wrongdoing after the SEC alleged the firm inappropriately shared expenses between portfolio companies held by different funds. The SEC in February accused Clean Energy Capital of using fund capital to pay more than $3 million of expenses it shouldn’t have. Clean Energy agreed to settle the matter for $2.2 million in October without admitting or denying the charges.
Such actions fall under the SEC’s “overarching” effort to combat conflicts of interest, Riewe said in her IA Watch speech.
“In nearly every ongoing matter we have in the Asset Management Unit, we’re examining, at least in part, whether the adviser has discharged its fiduciary obligation to identify conflicts (and) to either, one, eliminate them or, two, mitigate them or disclose them,” Riewe said in her remarks.
The SEC’s scrutiny of the industry has improved transparency and fund terms for limited partners, said Majid Mahmood, an SEC examiner who spoke on a panel at the conference.
“We’ve noted that certain practices are changing,” Mahmood said. “One key thing was increased transparency to limited partners and investors alike. I’m sure if you’re associated with a private equity firm, you’re very familiar with this.”
The SEC’s examination of fees charged to portfolio companies, and how those fees are used to offset management fees, has also led to an improvement of terms offered to limited partners, Mahmood said.
“Typically we would see 50 percent to 70 percent of those fees (that firms) received offset,” he said. “Lately – and I would say this is subsequent to the presence examinations – we’ve seen a shift in that. Now we’re seeing 80 percent at a minimum and, in some cases, it will be … 100 percent, which is what a lot of the larger firms have been steering towards.”
The SEC has been unusually vocal in its criticism of the private equity business. In May 2014, Office of Compliance Inspections and Examinations Director Andrew Bowden said in a speech that more than half of the funds examined by the SEC had violated the law or had material weaknesses in their handling of fees and expenses.
At the IA Watch conference, Bowden said anecdotal evidence suggests firms have become more transparent with their investors.
In January, WL Ross & Co said it reimbursed investors in its fifth flagship fund after miscalculating deal fees. The Wall Street Journal recently reported that Kohlberg Kravis Roberts & Co refunded investors after the SEC determined they had been overcharged for certain expenses.
“We have not done a scientific survey, but I think I have seen instances of firms … reacting” to SEC scrutiny, Bowden told Buyouts after his speech. He attributed some of the recent changes to tougher, and more knowledgeable, limited partners.
“We’re engaged with individual LPs and LP organizational groups, and they want to know, ‘What should I ask?’” Bowden told Buyouts.