Securities Regulation Daily Fund advisers settle breach of fiduciary duty charges
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Tuesday, August 23, 2016

Fund advisers settle breach of fiduciary duty charges

By Rodney F. Tonkovic, J.D.

Four private equity fund advisers affiliated with Apollo Global Management have agreed to settle SEC charges that they misled fund investors. The Commission found that the advisers failed to disclose that they benefitted from the acceleration of payment of monitoring fees. The advisers' financial statements were also misleading because they failed to disclose information about interest payments made on a loan. Finally, the Commission found that the advisers failed to supervise a senior partner who charged personal expenses to the funds. In addition to a cease and desist order, the advisers were ordered to pay disgorgement, interest, and penalties totaling $52.7 million (In the Matter of Apollo Management V, L.P., Apollo Management VI, L.P., Apollo Management VII, L.P. and Apollo Commodities Management, L.P.Release No. IA-4493, August 23, 2016).

Accelerated fees. According to the Commission, the advisers (collectively, "Apollo") entered into monitoring agreements with portfolio companies that were owned by Apollo-advised funds. Apollo terminated certain of these agreements and accelerated the payment of future monitoring fees. While Apollo had disclosed that it received monitoring fees as well as the amount of the accelerated fees, the advisers failed to adequately disclose that it may accelerate the fees upon termination of the agreements. Because of this conflict of interest as the recipient of the accelerated monitoring fees, Apollo could not effectively consent to this practice on behalf of the funds it advised, the Commission said.

Loan agreement. Next, one of the Apollo advisers failed to disclose certain information about interest payments made on a 2008 loan between that adviser's affiliated general partner and five funds. The Commission said that the loan had the effect of deferring taxes on carried interest due the general partner. While the lenders' financial statements disclosed the amount of interest that had accrued on the loan and included the interest as an asset, the statements failed to disclose that the accrued interest would be allocated solely to the general partner, which made the disclosures misleading.

Personal expenses. Finally, a former senior partner improperly charged personal items and services to Apollo-advised funds and their portfolio companies. According to the Commission, Apollo took no remedial or disciplinary action beyond a verbal reprimand and repayment of the improperly submitted expenses. The partner, however, continued to make improper charges that were ultimately uncovered by a firm-wide review. "Apollo failed to take appropriate action to protect its clients upon first learning that a partner was improperly expensing personal items and services to the funds, and its failure resulted in repeated misconduct," said Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.

Violations. Andrew J. Ceresney, Director of the SEC Enforcement Division, said: "A common theme in our recent enforcement actions against private equity firms is their failure to properly disclose fees and conflicts of interest to fund investors." Ceresney added that the investors "were not adequately informed about accelerated monitoring fees and separately allocated loan interest, and therefore were unable to gauge their impact on their investments."

The Commission found that Apollo violated Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 and issued a cease and desist order. The advisers were ordered to pay a civil monetary penalty in the amount of $12,500,000, plus disgorgement of $37,527,000 and prejudgment interest of $2,727,552. Based on the advisers' cooperation in the investigation and enforcement action, a higher civil penalty was not imposed.

Waiver. The Commission also granted Apollo Global Management a waiver of ineligible issuer status under Securities Act Rule 405 in connection with above conduct. The Division of Corporation Finance determined that Apollo Global Management made a showing of good cause under in Rule 405 and that it will not be considered an ineligible issuer by reason of the entry of the administrative order.

The release is No. IA-4493.

Companies: Apollo Global Management.

MainStory: TopStory Enforcement InvestmentAdvisers

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