SEC Fines PE Sponsor for Passing Operating Partner Expenses Through to Investors Without Adequate Disclosure

The SEC continues to focus on the proper disclosure of fees, expenses and conflicts of interest, requiring precise and fulsome language to be used in fund documents and marketing materials so investors can consent to, or reject, advisers’ practices on an informed basis. Although PE sponsors often give those issues careful attention when preparing current disclosures, there may be latent risk in older disclosures for closed-end PE funds. In a recent example of that risk, the SEC settled enforcement proceedings against a PE sponsor for inadequately disclosing its billing practices for services provided by its in-house operations group to the PE funds it managed. This article – which is vital reading for any PE sponsor passing through in-house expenses to its funds, or that is considering doing so in the future – analyzes the SEC’s cease-and-desist order; summarizes key takeaways therefrom; and includes insights from attorneys and consultants on lessons PE sponsors should heed. For coverage of SEC actions against advisers for failing to properly disclose the allocation of expenses to funds, see “Absent Proper Disclosure, Allocation of Manager Expenses to Funds May Bring Significant SEC Penalties” (Sep. 29, 2016); and “Inadequate Disclosure of Expense Allocations May Carry Unintended Consequences” (May 14, 2015).

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