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Introduction Thank you for that kind introduction Bruce. At the outset, Private equity alert jan 09 1 me give the requisite reminder that the views I express today are my own and do not necessarily represent the views of the Commission or its staff.
As you know, we have two offices here in California, the San Francisco and Los Angeles offices, and they are a critical part of our enforcement team. So I seize every chance I get to come out here, visit those offices and underline our presence on the West Coast.
Among the several ways we measure our success is the impact of our actions on particular sectors or markets.
Our work in the private equity space provides a concrete example of how our actions have led to real change in a market that has benefited investors enormously.
I plan to do three things today. Second, I will highlight certain problematic conduct and practices we have uncovered through our private equity enforcement actions, and note some of the common arguments we have rejected that have been advanced by some of the defendants in some of these actions.
Third, I will discuss how the industry has responded to our actions in altering certain practices and increasing transparency, all to the benefit of investors. Background Investments in private equity funds have increased significantly in recent years.
In most funds, on day one, investors are required to commit capital for investments that might not produce returns until 10 years or more down the road. As we all know, a lot can happen in ten years, and, unlike other types of investments, should issues arise, it is extremely difficult for an investor to withdraw their capital from a private equity fund investment.
It is thus critically important that advisers disclose all material information, including conflicts of interest, to investors at the time their capital is committed.
In addition, private equity fund investments themselves are different than other asset classes. Advisers typically charge the fund and the portfolio companies fees to compensate for these services.
Sometimes fees are not properly disclosed, conflicts are not aired, expenses are misallocated, and investors are defrauded. Private equity advisers are fiduciaries and need to fully satisfy the duties of a fiduciary in all of their actions.
Now, why is the SEC spending its limited resources on the private equity industry given the sophistication of most investors?
Because it is important to understand that retail investors are significantly invested in private equity. For example, public pension plans frequently invest the retirement savings of their plan beneficiaries — which include teachers, police officers and firefighters — in private equity funds.
Similarly, institutional investors have increased their investments in private equity funds, often on behalf of retail investors who themselves are saving for retirement. So, if an adviser defrauds a private equity fund, the underlying victims frequently include retail investors, who in many cases are not in a position to protect themselves.
In addition, while the managers of these pension funds and other institutional investors who invest in private equity can be sophisticated, even experienced investors can be defrauded if they lack transparency into the various fees, expenses, and practices - which has been the case in the past.
There is thus little question that private equity is an appropriate focus for the SEC. Prior toprivate equity fund advisers typically did not register with the Commission, and the Commission staff often had limited visibility into their practices.
However, intwo significant events occurred: Dodd-Frank required many private equity fund advisers to register with the Commission and be subject to periodic examination by OCIE, giving us increased visibility into the advisers.
At the same time, the Asset Management Unit began developing the expertise necessary to understand private equity fund advisers and their practices. OCIE examined many private equity advisers often for the first time and identified a number of deficiencies. The AMU has now brought eight enforcement actions related to private equity advisers — with more to come — and it is an appropriate time to step back and evaluate what we have learned thus far.
Enforcement Actions Our actions against private equity fund advisers fall into three interrelated categories, which I will discuss in turn: Advisers that receive undisclosed fees and expenses; Advisers that impermissibly shift and misallocate expenses; and Advisers that fail to adequately disclose conflicts of interests, including conflicts arising from fee and expense issues.
Undisclosed Fees and Expenses One issue we have seen in our cases is undisclosed fees and expenses and the Blackstone case vividly illustrated these issues. Although Blackstone disclosed in its offering documents that it might receive monitoring fees from portfolio companies, it failed to disclose to its funds, and the limited partners prior to their commitment of capital, that it might accelerate future monitoring fees upon termination of the monitoring agreements.
In some instances, Blackstone terminated the monitoring agreement, and accelerated monitoring fee payments, even where the relevant Blackstone-advised fund had completely exited the portfolio company, meaning that Blackstone would no longer be providing monitoring services to the portfolio company.
In other words, the payments to Blackstone essentially reduced the value of the portfolio companies prior to sale, to the detriment of the funds and their investors. It is important to emphasize that our action took no position on the propriety of accelerated monitoring fees.
Instead, our concern was making sure that the adviser complied with the fund offering documents and made timely, accurate and full disclosure of conflicts of interest and other material facts. In many cases, private equity fund advisers enter into agreements with their portfolio companies to provide monitoring services in return for a fee.Private Equity Alert is published by the Private Equity practice group of Weil, Gotshal & Manges LLP, Fifth Avenue, New York, NY , +1 , plombier-nemours.com The Private Equity group’s practice includes the formation of private equity funds and the execution of domestic and cross-border.
The private equity industry should expect increased scrutiny by the Securities and Exchange Commission (SEC), particularly with respect to insider trading and how firms address conflicts of interest, according to recent speeches by representatives of the SEC Division of Enforcement’s new Asset Management plombier-nemours.com://plombier-nemours.com · The World Bank Implementation Status & Results Report Senegal Quality and Equity of Basic Education (P) 6/27/ Page 1 of 12 Public Disclosure Copy Public Disclosure Copy Senegal Quality and Equity of Basic Education (P)plombier-nemours.com Join Armco CU Apply for a Loan Apply for a Mortgage.
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