By Phyllis Tsai, CPA – Manager – WithumSmith+Brown, PC
A recent speech made by Andrew Ceresney, Director of Enforcement, pointed out three categories which the recent SEC enforcement actions have fallen into:
- Advisers that receive undisclosed fees and expenses
- Advisers that impermissibly shift and misallocate expenses
- Advisers that fail to adequately disclose conflicts of interest, including conflicts arising from fee and expense issues.
Throughout these enforcement actions, some advisers had argued that fund disclosures had been drafted long before the advisers were required to register with SEC, it is unfair to charge advisers for their failures in disclosure. The SEC, however, felt that the private equity fund advisers always had a fundamental fiduciary obligation to make full disclosure of all material facts relating to its advisory services along with all material conflicts of interest between the manager and its funds. Therefore, they are still liable for disclosure failures. It is also irrelevant to argue that the investors have benefited from the services provided by the advisers even though the advisers have failed to disclose a conflict of interest. Finally, the advisers are ultimately responsible for their actions and cannot escape liability simply by referring to advice which they received from their counsel.
In addition to the SEC, a group of state and city comptrollers and treasurers also requested the SEC to demand private equity funds make disclosures of fees and expenses more frequently than they do now to increase transparency. Some large state retirement systems feel that they do not have a full grasp over the costs of their private-equity investments. More clear and consistent disclosures would give them “a stronger negotiating position, ultimately resulting in more efficient investment options,” according to the letter which this group of comptrollers and treasurers sent to the SEC.