News & Articles

Fiduciary Focus in Enforcement

July 15, 2016

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Over the past few years, the SEC has increased their focus on private equity and continues to do so. Given the legal structure of private equity funds, it is difficult for investors to withdraw their capital from private equity investments should issues arise, making it critically important that all material information such as conflicts of interest are disclosed to investors at the time their capital is committed. In his speech at the Securities Enforcement Forum in May, Andrew Ceresney, Director of the SEC’s Enforcement Division, emphasized the fiduciary duties owed to investors by advisers, and the vulnerability of investors to fraud in situations where fees or conflicts of interest have not been disclosed, and where expenses have been misallocated.[1] These areas—receipt of undisclosed fees and expenses, misallocation of expenses, and failure to adequately disclose conflicts of interest—comprise the bulk of the SEC’s actions against private equity fund advisers.

In a recent enforcement action reflecting the SEC’s focus on private equity funds and breaches of fiduciary duty, private equity firm Apollo Global Management was charged with disclosure and supervisory failures, ending in a $52.7 million settlement.[2] The SEC found that Apollo had breached its fiduciary duty by failing to adequately disclose accelerated monitoring fees and making materially misleading disclosures about the allocation of interest on a loan. Finally, the SEC found that Apollo failed to reasonably supervise a partner who improperly charged personal items and services to   Apollo-advised funds and their portfolio companies.

Enforcement in these areas is certainly not limited to private equity; inadequate fee disclosures and nondisclosure of conflicts of interest remain a target across the board, as demonstrated by the recent SEC action against Momentum Investment Partners.[3] In this case, an advisory firm was charged with fraud for failing to disclose additional fees and material conflicts of interest. During its investigation, the SEC found that the firm moved some of its existing clients into new mutual funds, but failed to disclose that this shift would increase their advisory fees without a corresponding change in the clients’ investment strategy or additional services. As a result of the move, clients paid approximately $111,000 in additional fees.

Anti-money laundering (AML) violations continue to be pursued at all levels across regulatory agencies.

In the Financial Industry Regulatory Authority’s (FINRA) largest fine to date for AML failures, independent broker dealer Raymond James Financial Services was fined $17 million.[4] During their investigation, FINRA found that Raymond James missed multiple red flags of potentially suspicious activity, and that its AML policies and procedures were inadequate for the firm’s size. Notably, these AML failures were a recurring offense. Raymond James was sanctioned in 2012 for having inadequate procedures, and as part of their settlement agreed to review their program to meet the relevant compliance requirements. Additionally, the firm’s AML compliance officer received a $25,000 fine and was suspended for three months, reflecting the regulatory trend of increased individual liability for compliance failures.

In June, the SEC charged New York brokerage firm Albert Fried for AML failures, settling for $300,000.[5] The SEC found that the firm ignored numerous red flags that should have triggered the filing of suspicious activity reports (SARs). This was the first action brought against a firm solely for failing to file SARs.

SEC enforcement actions this year have surpassed the record levels from 2015, with a total of 868 actions and over $4 billion in disgorgement and penalties ordered.[6] As such, anything less than constant vigilance in a fund’s compliance efforts is ill-advised.

 

[1] Andrew Ceresney, Securities Enforcement Forum West Keynote Address: Private Equity Enforcement (May 12, 2016) <https://www.sec.gov/news/speech/private-equity-enforcement.html>

[2] In the Matter of Apollo Management V, L.P., Apollo management VI, L.P., Apollo Management VII, L.P., and Apollo Commodities Management, L.P. Release No.4493, AP File No.3-17409, available at: <https://www.sec.gov/litigation/admin/2016/ia-4493.pdf>

[3] Securities and Exchange Commission v Momentum Investment Partners LLC (D/B/A Avatar Investment Management) and Ronald J. Fernandes, <https://www.sec.gov/litigation/complaints/2016/comp23549.pdf>

[4] Financial Industry Regulatory Authority Letter of Acceptance, Waiver and Consent No. 2014043592001 Re: Raymond James & Associates, Inc, available at: <https://www.finra.org/sites/default/files/RJFS_AWC_051816_0.pdf>

[5] In the Matter of Albert Fried & Company, LLC, Release No. 77971, June 1, 2016, AP File No.3-17270, available at: <https://www.sec.gov/litigation/admin/2016/34-77971.pdf>

[6] Press Release, ’SEC Announces Enforcement Results for FY 2016’ (October 11, 2016) <https://www.sec.gov/news/pressrelease/2016-212.html>