Investment Fund Law Blog
In a letter to SEC Chair Mary Jo White, the Treasurers and Comptrollers of 13 states have urged the SEC to crack down on private equity funds and require better disclosure of expenses to limited partners.
Fees and expenses in the private equity space have in general been a recent focus of the SEC. In a high-profile case this spring, Kohlberg Kravis Roberts & Co. (KKR) was fined nearly $30 million for misallocating so-called “broken deal” expenses to its flagship private equity funds and none to co-investors. KKR, however, failed to adopt policies and procedures governing broken deal expense allocations during the period in question, which contributed to a finding of breach of fiduciary duty. KKR also did not expressly disclose in its funds’ limited partnership agreements and related offering materials that it did not allocate any of the broken deal expenses to co-investors.
The issue that the state Treasurers brought up in their letter to the SEC may be differently motivated. The main complaints of the letter, inadequate expense reporting and opaque calculations of management fee offsets, surfaced shortly after some large state pension funds came under fire for failing to track and providing incorrect reporting of the amount of fees and carried interest paid to the private equity managers they invested with over the course of many years. One of the Treasurers noted that the letter was independently generated following discussions of transparency issues among the Treasurers for more than a year, and not as a result of those criticisms.
The full Treasurers and Comptrollers’ letter to the SEC is available HERE.