When it comes to tracking expense allocations at SEC registered private equity firms and other private funds, a recent SEC case and the enduring pandemic shed light on how to avoid regulatory attention in this area. It’s critical that senior management and compliance have appropriate and effective policies and procedures on expense allocations, including oversight of non-reimbursable personal expenses. A 2017-2019 case recently won by the SEC against a former employee of Apollo Management demonstrated deficiencies with the firm’s expense allocation policies and procedures, and that it’s practices were in violation of certain disclosures about expenses. In speaking with Private Equity Law Report, Amy Lynch, FrontLine’s Founder and President, states that a “tone at the top” is critical and sets expectations for compliance with expense policies. She further adds that employee certification of the policies is not enough to ensure they are effectively implemented, so firm wide and individualized training should be mandatory. Expense allocations at PE firms have also taken on a greater focus for the SEC since the pandemic, an environment where expenses may have changed from the typical. Ms. Lynch expects the SEC to look closely at expenses related to items necessitated by the pandemic, such as support for an expanded remote work force. She notes that the SEC would be most interested in expense amounts that are material and could be harmful to investors if borne by the fund and not directly attributable to fund activities.
See Private Equity Law Report (subscription required), “Court Fines Former Apollo Partner $240K for Misallocating Personal Expenses; Places ‘Significant Blame’ on Firm’s Internal Practices”
Also see Private Equity Law Report (subscription required), “Tips for Allocating Pandemic-Related Expenses Such As Private Jets, Pandemic Insurance and Others”