On August 23, 2016, the SEC entered into a settlement that reflects a continuation of its recent trend of increasingly active pursuit of private equity firms, particularly for failing to disclose conflicts of interests and other material information to investors. The SEC entered into a $52.5 million settlement with four private equity fund advisers affiliated with Apollo Global Management LLC (collectively "Apollo") arising out of insufficient disclosures and supervisory failures.
Traditionally, the private equity industry has not been heavily regulated, at least in part due to the perceived sophistication of industry participants. Since the enactment of the Dodd-Frank Act, however, private equity firms – particularly private equity fund advisers – have encountered more regulatory oversight, including registration requirements and periodic regulatory examinations. Notably, the SEC has articulated its aim to "aggressively bring impactful cases" against industry participants.
With regard to Apollo, the SEC contended that Apollo entered into certain "monitoring agreements" with portfolio companies owned by Apollo-advised private equity funds. Under these agreements, Apollo obtained "monitoring fees" in exchange for providing advisory and consulting services to the portfolio companies. The agreements ran for a period of ten years, but allowed Apollo to terminate the agreements in certain instances – including in the event of a private sale or IPO – and collect accelerated monitoring fees. The accelerated monitoring fees often reduced the value of the funds' assets at the time of the portfolio company's sale or IPO and similarly reduced the amounts available for distribution to the funds' limited partners. According to the SEC, Apollo failed to adequately disclose its ability to collect accelerated fees until after limited partners had already committed capital to the funds and the accelerated fees had been paid. The SEC contended that Apollo's potential receipt of the accelerated fees presented a conflict of interest, rendering it unable to effectively consent to the monitoring agreements on behalf of the funds.
The order also stated that Apollo failed to disclose information regarding a June 2008 $19 million loan agreement between Apollo Advisors VI, L.P. – a general partner of an Apollo fund – and five private equity funds, which had the effect of deferring taxes. The loan agreement obligated Apollo Advisor VI to pay interest to the funds until the loan was repaid. From June 2008 to the termination of the loan in August 2013, the funds' financial statements disclosed the amount of interest that accrued on the loan, and included the interest as an asset of the funds. However, the financial statements failed to disclose that the accrued interest would be allocated solely to Apollo Advisor VI's capital account, meaning that Apollo Advisor VI was effectively paying interest to itself. Thus, the SEC contends, the disclosures in the funds' financial statements regarding the interest were materially misleading.
The order also stated that Apollo failed to adequately monitor and discipline an Apollo partner who improperly charged personal goods and services to clients, and fabricated information to hide his conduct. Finally, the SEC contended that Apollo failed to implement adequate policies designed to protect against the adviser firms' alleged misconduct.
The SEC charged Apollo with violations of Sections 203(e)(6), 206(2) and 206(4) of the Advisers Act and Rules 206(4)(7) and 206(4)-(8) promulgated thereunder. Without admitting or denying the allegations, Apollo agreed to pay approximately $40 million in disgorgement and interest to the funds, a $12.5 million penalty to the SEC, and to cease and desist from further violations. In levying the penalties, the SEC took into account Apollo's remedial efforts, including its cooperation with and voluntary provision of information to the Commission.
The SEC's case against Apollo is only the latest example of its expanded focus on private equity funds, and its push to increase transparency and compliance with fiduciary duties in the industry. It serves as a warning sign to industry participants – especially private equity advisers – of the risks of incomplete disclosures to investors, particularly as they relate to fees, expenses, and associated conflicts of interests. The resolution also highlights the potential benefits of cooperation with and voluntary provision of information to the SEC in connection with the ultimate monetary and non-monetary resolution of the matter.
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