July 15, 2016

Author:

sycr.com

SEC Fines Fund Adviser $39 Million for Failing to

Adequately Disclose Monitoring Fees
The Securities and Exchange Commission has been focusing on the lack of
disclosure by fund managers to investors regarding the receipt of monitoring fees.
Recently, the SEC fined The Blackstone Group $39 million for failing to adequately
disclose the acceleration of monitoring fees paid by the funds portfolio companies.

Benedict Kwon
Shareholder
(949) 725-4165
Bkwon@sycr.com
Mr. Kwon is the current Chair of
the American Bar Association
Private Equity and Venture Capital
Fund Formation Subcommittee.

The monitoring fees were fees charged by Blackstone to the portfolio

companies for its consulting and advisory services provided to the portfolio company.
The typical term for the monitoring fees was ten years. Blackstone would often
terminate the monitoring agreement and accelerate the monitoring fees and receive
such amounts in a lump sum prior to the sale of the portfolio company or in an initial
public offering of the portfolio company.
The SEC noted that although Blackstone disclosed to its investors in its
private placement memorandum and limited partnership agreement of its intent to
collect monitoring fees, Blackstone did not disclose the acceleration of such fees until
after Blackstone had accelerated such fees. The disclosure was made to its investors in
its quarterly management reports. Thus, by the time the disclosure of the acceleration
of monitoring fees had been made to the investors, the investors had already
committed to the fund.

Based on the above actions by Blackstone, the SEC concluded that Blackstone
violated Section 206 of the Investment Adviser Act, which prohibits investment
advisers from engaging in any practice or course of business that operates as a fraud
or deceit upon any client.
The position taken by the SEC in recent examinations should be a warning to
investment advisers to fairly and adequately disclose any monitoring fees charged by
the adviser to a portfolio company. The SEC appears to be concerned with investors
receiving such information prior to the investors capital commitment to the fund so
that that the investor can make an informed investment decision.

This publication is provided for your convenience and does not constitute legal advice. It is
prepared for the general information of our clients and other interested persons. This publication
should not be acted upon in any specific situation without appropriate legal advice.

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