Category: Alerts

SEC Enforcement Action: Failure to Disclose Expenses Charged to Private Fund Portfolio Companies

 

Recently, the Securities and Exchange Commission announced settled charges against New York-based private equity fund adviser Monomoy Capital Management, L.P., for failing to fully disclose or obtain consent to its practice of charging private fund portfolio companies for the costs of certain services.

According to the SEC’s order, Monomoy provided fund portfolio companies with operationally focused services through a group of Monomoy employees known as the Operations Group. Monomoy charged portfolio companies for the services of the Operations Group, which allowed Monomoy to recoup most of its costs of maintaining the group. The SEC’s order finds that Monomoy did not, however, provide full and fair disclosure that it would charge the portfolio companies for the services, or otherwise obtain consent to the associated conflicts of interest.

Without admitting or denying the SEC’s findings, Monomoy has consented to the entry of the Order finding that it violated the antifraud provision of Section 206(2) of the Investment Advisers Act of 1940. Monomoy also agreed to cease and desist from further violations and to be censured. Monomoy agreed to pay disgorgement of $1,521,972 and prejudgment interest of $204,606, and a civil penalty of $200,000. The disgorgement, prejudgment interest and penalty, totaling $1,926,579, will be contributed to a Fair Fund, and Monomoy will distribute the funds to the affected investors.1

With the SEC planning to keep the Division of Examinations even busier in the months ahead, will you need help getting your firm ready for what this might bring to your door?

Among the expense allocations the SEC finds the most problematic are investment banking fees, transactions fees and monitoring fees. Some examples of these expenses include:

Expenses absorbed by private equity fund managers as part of their management fee.
Expenses charged to the fund and ultimately paid for by investors as part of operating costs.
Expenses included in the management fee which are charged to the advisor.
Expenses charged to the fund and ultimately paid by investors as part of operating costs.

Firms should consider conducting a focused review of authorized expenses and fees outlined in the limited partnership agreement (LPA) including the expense allocations for investment banking fees, transaction fees and monitoring fees, and their related disclosures to identify any issues and the policies and procedures governing fee and expense allocations.

How Alaric Can Help

As an industry leader with nearly 275 years of cumulative financial services compliance experience, we have the expertise to help you.

Alaric’s team members have managed over 100 regulatory examinations as Chief Compliance Officers. We have also conducted hundreds of mock SEC audits, focused reviews, and other compliance-related consulting projects. Leveraging this experience, we are in the unique position of both understanding the current regulatory trends and hot topics and having the practical, hands-on experience that enables us to offer our clients an approach to regulatory compliance that is founded on a deep knowledge and every-day application of industry best practices.

Call us at 1-888-243-2448 to learn more about how we can help you prepare, visit our website, at www.alariccompliance.com, or email us at info@alariccompliance.com.
1 https://www.sec.gov/litigation/admin/2020/ia-5485.pdf

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