- Private Equity Fund Adviser Charged with Misallocating Broken-Deal Expenses
- July 2, 2015
- Law Firm: Sutherland Asbill Brennan LLP - Washington Office
The SEC recently announced its first enforcement action brought against a private equity adviser for misallocating “broken-deal” expenses.
According to the SEC’s order instituting cease-and-desist proceedings, the SEC charged Kohlberg Kravis Roberts & Co. (KKR) with misallocating more than $17 million in broken-deal expenses to its flagship private equity funds, in breach of its fiduciary duty. While some of KKR’s co-investors, which included KKR executives, participated in and benefitted from KKR’s sourcing of private equity transactions, KKR did not specifically disclose that broken-deal expenses would not be allocated to these co-investors, either in the funds’ limited partnership agreements or offering materials.
According to the SEC’s order, KKR also failed to adopt and implement a written compliance policy or procedure governing its broken-deal expense allocation practices until 2011. As a result of this failure, the SEC found that KKR violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 promulgated thereunder. KKR agreed to pay nearly $30 million to settle the SEC’s charges and consented to the entry of the SEC’s order without admitting or denying the SEC’s findings.