Partner Marc Rosen comments on hedge funds’ continued entry into the private equity space and potential pitfalls

Kleinberg Kaplan Litigation chair Marc Rosen was quoted extensively by Hedge Fund Law Report concerning a December 21, 2017 cease-and desist order by the SEC against private equity fund adviser TPG Capital Advisors (TPG), and what the SEC’s order may signal about the SEC’s enforcement priorities in the coming year.

As further detailed in the January 25, 2018 article “SEC Enforcement Action Highlights Highly Specific Regulatory Focus on Conflicts of Interest,” the SEC order concerned TPG’s termination of monitoring agreements with several of its portfolio companies, and the inadequacy of TPG’s disclosures to investors regarding accelerated monitoring fees collected in connection with the terminations. The SEC charged that, although TPG had disclosed the fees themselves after they had been collected, it had failed to disclose the significant conflicts of interest that arose from its monitoring fee practices. As Mr. Rosen commented, “TPG, like other private equity firms, was paid for future services that were not rendered by virtue of the sale of certain portfolio companies. In this case, the acceleration of the TPG fees was triggered many years ago. It took the SEC a number of years to institute this enforcement proceeding.”

Mr. Rosen was further quoted regarding what this may portend for hedge funds. He explained that although monitoring agreements and the disclosure of their accelerated fees has generally not involved hedge funds directly, a closer analogue is the question of what to do with director fees when an employee at a management company is on the board of a hedge fund’s portfolio company. In those circumstances, most hedge fund managers would distribute the director fees to the fund in their entirety.

Mr. Rosen noted that “[a]s always, hedge funds and their managers are laser-focused on not engaging in any conflicted activities, not running afoul of the securities laws and disclosing everything that needs to be disclosed for the benefit of the funds’ limited partners.” Mr. Rosen stated that “[i]t is a priority for hedge funds to avoid not only conflicts of interest, but even the appearance of these conflicts. If hedge funds share fees and expenses with multiple portfolio companies, it is critical for them not to benefit one improperly over another.” With respect to monitoring fees collected by hedge funds, Rosen added that any accelerated monitoring fees “need to be sufficiently disclosed upfront in order for hedge funds to maintain investor confidence and to avoid punitive measures by the SEC.”

The full Hedge Fund Law Report article can be found here.