Blackstone is the latest private equity firm to settle SEC charges of conflicts of interest and inadequate fee disclosures, agreeing to pay $39 million over problems with their investor disclosures on accelerated monitoring fees and discounts on legal services.
Monitoring fees are charged by private equity firms for advisory work to their private companies. When they sold a company or performed an IPO, they were entitled to a lump-sum payment under the contract. Blackstone allegedly didn’t disclose this potential payment to their clients when they invested money in the firm. The firm also didn’t disclose to investors that it received a bigger rebate on expenses in legal services than it provided to them.
Under the agreement, Blackstone paid a fine of $10 million and disgorged profits of nearly $29 million, including interest. The SEC press release included a statement from the SEC’s director of the enforcement division indicating they will continue to bring enforcement actions against advisers that do not adequately disclose their fees and expenses.
Private equity fees have been a major issue recently, as pension funds have complained both about excessive fees in the industry and about insufficient disclosures concerning the fees they are being charged.
The SEC has also been looking at this issue. In June, KKR paid $30 million to settle SEC charges that they breached their fiduciary duty related to its fees and expenses. They were charged with misallocating broken deal expenses to investors following acquisitions that were not consummated. KKR agreed to pay nearly $30 million to end the investigation.