SEC Settles Charges Against Private-Equity Firm for Alleged Disclosure Policy Failures

Who may be interested: Investment Advisers

Quick Take: The SEC settled charges against a private-equity fund Adviser for failing to maintain and enforce policies and procedures reasonably designed to prevent the misuse of material nonpublic information (MNPI) and to implement policies and procedures reasonably designed to prevent misleading communications concerning performance of the funds managed by the Adviser.

According to the SEC’s order, on numerous occasions senior personnel of the Adviser disclosed MNPI about mergers and acquisitions of public companies to current and potential investors, industry contacts and personnel of the Adviser. The Adviser’s policies and procedures prohibited disclosure of MNPI “except as may be necessary for legitimate business purposes“; however, the senior personnel of the Adviser often disclosed merger-related MNPI without making such a determination. The order found that the Adviser failed to maintain and enforce policies and procedures designed to prevent the misuse of MNPI and of other confidential, non-public information belonging to funds advised by the Adviser.

The SEC’s order also found that communications sent by senior personnel of the Adviser violated the Adviser’s policies concerning advertisements and fund performance. Under the Adviser’s policies, any written communication addressed to more than one person was subject to prior approval by compliance personnel as an “advertisement” and was required to present any performance data fairly and in a non-misleading manner with appropriate explanatory footnotes. Further, under the Adviser’s policies, personnel of the Adviser were permitted to use fund valuations and valuation-based performance statements in communications with current or potential investors only if they had been approved by the Adviser’s valuation committee.

The SEC’s order stated that, on multiple occasions, senior personnel of the Adviser sent out advertisements containing performance information that had not been approved by compliance personnel and lacked the requisite explanatory footnotes. The order also found that on several occasions senior personnel of the Adviser made quantified performance or embedded-gains claims in emails to current and prospective investors, which were based on estimated valuations of a fund’s portfolio companies that had not been approved by the Adviser’s valuation committee.

The SEC’s order found that the Adviser violated Sections 204A and 206(4) under the Advisers Act and Rule 206(4)-7 thereunder. The Adviser received credit for its cooperation and remedial efforts, including the enhancement of compliance policies and procedures for MNPI and the implementation of firmwide compliance training related to investor communications. Without admitting or denying the findings, the Adviser agreed to a cease-and-desist order, a censure, and to pay a civil penalty totaling $4 million.

The SEC's order can be found here.