On May 12, 2016, Securities and Exchange Commission (“SEC”) Enforcement Director Andrew Ceresney gave the keynote address at the Securities Enforcement Forum West 2016 in San Francisco. Remarks at the Securities Enforcement Forum West 2016
(May 12, 2016). In his remarks, Ceresney defended the need for enforcement activity in private equity, reviewed recent prominent actions, addressed common arguments made by subjects of investigations, and argued that recent enforcement activity in the private equity industry had led developments that protected investors.
Ceresney began his remarks by emphasizing the need for private equity enforcement given how private equity differs from other asset classes. Private equity investment advisers, for example, typically take interests in companies in their portfolios, serve on those companies’ boards, and charge fees for these services to their funds and the portfolio companies, which, according to Ceresney, create unique opportunities for misconduct. Ceresney also stated that the SEC’s focus on private equity was necessary to protect institutional investors like public pension plans who increasingly invest in private equity. While some might argue that these institutional investors are particularly sophisticated and thus less
in need of public protection, the SEC is pushing increasing resources into this field.
Ceresney reviewed three prominent settlements involving private equity from 2015 and described the alleged misconduct each addressed, suggesting that these represent themes the SEC is continuing to pursue. These settlements included enforcement actions against Blackstone, which focused on the importance of properly disclosing and obtaining informed consent to fees; KKR, Lincolnshire, and Cherokee, which involved allocation of expenses among funds and between funds and advisers; and Fenway Partners, which involved disclosure of conflicts of interest. Within the industry, each of these enforcement actions has been closely watched as given the granular scrutiny the SEC applied to the firms’ disclosures and practices.
Ceresney also addressed and dismissed three common arguments he said have been made by subjects of private equity investigations: (i) it is unfair to charge advisers for disclosure failures in organizational documents that were drafted before the SEC began to focus on private equity; (ii) undisclosed conflicts of interest should not result in enforcement actions where investors still benefit from participating in the fund; and (iii) advisers should not be subject to enforcement actions when acting on the advice of counsel. In short, Ceresney said that advisers are responsible for their conduct, regardless of when it began, regardless of whether investors ultimately benefited, and regardless of why advisers chose to engage in it. Indeed, his remarks suggested something approaching strict liability for private equity advisers who run afoul of the Investment Advisers Act of 1940.
Finally, Ceresney concluded his remarks by promoting the deterrent impact of the SEC’s enforcement activity. For example, he noted that private equity advisers have changed fee and expense practices and generally been more transparent about fees and expenses as a result of the SEC’s public enforcement actions. He also highlighted that Institutional Limited Partners Association has released a Fee Transparency Initiative to establish consistent fee and expense reporting standards and that a “healthy dialogue between investors and advisers on what sorts of fees are appropriate” had begun.
Ceresney’s remarks did not signal a new approach toward private equity, or otherwise disclose new areas of concern. However, the tone made clear that Ceresney believes the Enforcement Division’s focus on private equity over the last two years has been a major success. There is every reason to assume that Ceresney will aim to keep that momentum going forward through additional enforcement investigations and actions.