SEC Fines KKR For Fiduciary Duty Breach on Broken Deal Expenses


Kohlberg Kravis Roberts & Co. will pay the SEC nearly $30 million to settle charges that it breached its fiduciary duty when it misallocated $17 million in “broken deal” expenses. This is the first SEC case of its kind against a private equity adviser.

The SEC charged KKR with violations of Sections 206(2) and 206(4)of the Investment Advisers Act of 1940 as well as Rule 206(4)-7. The charges stemmed from the allocation of expenses from unsuccessful buyout opportunities. Pursuant to a fee sharing arrangement with its main private equity fund, KKR was supposed to bear 20% of these expenses. However, KKR did not allocate expenses to any co-investors that participated in buyouts for several years and did not disclose to the limited partners in the main fund that it was not allocating expenses to its co-investors.

The SEC has been examining the disclosure of private equity fees to investors for over a year. In a May 6, 2014 speech, Director of the SEC’s Office of Compliance Inspections and Examinations Andrew J. Bowden gave a speech titled Spreading Sunshine in Private Equity.

We expect that there will be more fines against other private equity advisers to follow after this one. This speech has spurred at least two SEC whistleblower tips that have been made public.

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