There was a lots of hand-wringing after a speech by David Blass indicated that the SEC was focusing on transaction based fees that private equity funds were earning on securities transactions. Since then, there has been rumblings during presence exams, but no official enforcement action or ruling from the SEC.
One group of fees at issue was compensation paid to the fundraising team. If your sales team was paid a commission on fund commitments, it raised an issue of broker/dealer registration for the employee. The second group was the fund or fund manager receiving fees for arranging debt or equity for a portfolio company. This raised broker/dealer issues for the fund manager.
Gretchen Morgenson wrote a story in the New York Times that was focused on the hiring of an independent adviser to monitor a private equity fund’s practices. That oversight was triggered by an SEC exam in April 2013, according to the story.
Although the monitoring aspect is interesting, I also found the trigger events to be more interesting. The firm was “reaping fees from investment-banking-type transactions without fulfilling the regulatory requirement of being registered as a broker-dealer.” This seems to be evidence that the SEC is (or was) looking at this issue during private fund exams.
But, the story also notes that the firm was failing to share those fees with the funds as apparently required by the fund documents. So that leaves it unclear if the SEC was continuing to focus on broker/dealer registration or was merely noting a violation of fee calculations. (Not that violating fee calculations is okay.)
Sources:
- Entering the Secret Garden of Private Equity by Gretchen Morgensen in the New York Times
- Private Equity Miscreant Freeman Spogli Illustrates Investor and SEC Cowardice by Yves Smith in naked capitalism
- Are Your Private Fund Employees Licensed?