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SEC Private Fund Adviser Enforcement Action Focuses on Undisclosed Cost Components of Fees

September 26, 2022

Private fund adviser fees continue to be a focus for the SEC. The SEC brought an enforcement action against two real estate private fund advisers for including the anticipated income tax liability of $54.6 million of one of the advisers’ founders as a part of the fees charged to their private equity fund clients and failing to disclose specifically the cost components for 12 years.

After detecting the undisclosed fee during an internal review in 2018 – before the SEC action – the advisers reimbursed the funds $68.5 million, which included interest on the undisclosed tax liability charges, and disclosed the reimbursement to the limited partner advisory committee (LPAC) in December 2020. Then in August 2022, the firms made additional investor disclosures and the founder made additional interest payments to the funds. The firms also implemented numerous controls to their polices related to fees and expenses.

The SEC order found that: (i) by law, these tax liabilities were payable by the adviser’s owner rather than by that adviser and (ii) prior to the 2018 review, the advisers did not disclose to the funds or the LPAC the inclusion of the tax liabilities in the fees to their clients, which was alleged to be a conflict of interest. The order also found that the advisers failed to implement appropriate policies and procedures in connection with conflicts of interest related to the undisclosed fee practice. The advisers agreed to a cease-and-desist order finding that they violated Sections 206(2) and 206(4) of the Advisers Act and Rules 204(6)-7 and 206(4)-8 thereunder, and, notwithstanding the voluntary corrections described above, paid an $11.2 million civil penalty.

See In the Matter of Hudson Advisors L.P. and Lone Star Global Acquisitions, Ltd. (Sept. 12, 2022).

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