The Securities and Exchange Commission brought an action against Blackstone for failing to disclose fees received from portfolio companies and for discounts from legal firms that it worked with, but without passing these savings on to investors. The monitoring fee issue has been discussed in compliance circles for some time. The legal fees action is new and caught my eye.
I had heard of an instance where the SEC gave a deficiency for charging in-house lawyers’ time to a fund and its investments without properly disclosing that practice. This is different.
According to the order, Blackstone received a larger discount on legal fees as fund manager than the funds received. Blackstone told investors that the differential reflected the different mix of work performed by the unnamed law firm for the fund manager and the fund.
Other items I noted on the issue is that the differential was in place between 2008 and 2011. Blackstone’s internal audit discovered the problem in 2011 and Blackstone changed practices. So this issue was discovered and corrected years ago. So why is the SEC bringing an action now? Maybe this is just a “pile-on” by the SEC to express its displeasure.
I’m confused about how the arrangement for legal fees worked. Blackstone said it was based on the mix of work.
Perhaps the law firm was offering a 25% discount on HR/employee work, 10% on fund formation, and 5% on M&A deals. The fund, the fund formation, and fund investments would use these legal services in different amount and so the discount would not be uniform. That would result in a disparate discount. Maybe that is what happened?
Clearly a fund manager cannot have its law firm provide discounted services for the fund manager in exchange for allowing full pricing for the fund. That’s shifting costs from the fund manager to the fund. (Of course if it’s disclosed ahead of time, a fund manager could do so.)
The frustrating thing about the order is that its not clear what Blackstone did. So other compliance professional cannot use it to figure out what the SEC wants fro mfund managers.
As to the monitoring fees:
“This SEC matter arose from the absence of express disclosure in marketing documents, 10 or more years ago, about the possible acceleration of monitoring fees,” Blackstone said, calling the practice common in the industry. Blackstone voluntarily made changes to the applicable policies before the inquiry began, according to a spokesperson.
Obviously, the SEC continues to focus on fees and expenses for private fund managers.
Sources:
- Blackstone Charged With Disclosure Failures
- SEC order
- SEC fines Blackstone Group $39 million over fee disclosure omissions by Francine Mckenna in MarketWatch
- Blackstone Settles With SEC Over Certain Fee Practices by Lisa Beilfuss in the Wall Street Journal