Two recent SEC enforcement actions prove that the regulators are indeed scrutinizing the private equity market. SEC v. Oppenheimer Asset Management, Inc. and Oppenheimer Alternative Investment Management, LLC focused on portfolio valuation. SEC v. Ranieri Partners LLC and Donald W. Phillips found violations of broker-dealer registration rules regarding solicitation.
Private equity firms should take notice of these cases and review their valuation and solicitation practices against the findings noted.
Summary and Analysis:
Recent SEC Case Findings involving Private Equity Firms
Portfolio Valuation Violations: SEC v. Oppenheimer Asset Management, Inc. and Oppenheimer Alternative Investment Management, LLC
- Fund of fund manager altered the valuation received by one of the underlying managers for a specific position, significantly increasing the value. This occurred without notifying investors, the underlying manager, or disclosing the change and its effect on the overall fund performance.
- Marketing pieces were only reviewed for general compliance disclosures while the valuations disclosed were not verified prior to distribution of the materials.
- Misrepresentations made to potential investors included: (1) no disclosures regarding the new valuation method used by the fund manager (2) disclosing to potential investors that the underlying fund was audited, when it actually was not audited; and (3) disclosing the use of a third party valuation firm by the underlying manager when it actually did not use one.
- Firm policies and procedures were not designed and implemented to detect and prevent violations of the Advisers Act, as required.
Compliance staff is urged to include valuations in the overall portfolio compliance program of the firm as well as review marketing materials for compliance with those policies and procedures.
Solicitation Violations: SEC v. Ranieri Partners LLC and Donald W. Phillips
- Fund manager was found to have “caused” and one of its officers was found to have “aided and abetted” violations of Section 15(a) of the Exchange Act (registration rules).
- Violation resulted from a business relationship between the fund manager and an unregistered person for solicitation purposes.
- The unregistered person had no relationship to the fund or the fund manager and acted as an independent consultant compensated based upon sales of the fund.
- The independent consultant also had a disciplinary history with the SEC that had resulted in a bar from being associated with an investment adviser and he had not applied for reinstatement.
- The fund manager’s officer had a previous business relationship with the consultant and knew of his disciplinary history.
Only registered broker-dealers may offer and sell shares of private funds for transaction-based compensation under Section 15(a) of the Exchange Act. There is an exemption provided under Rule 3a-4 of the Exchange Act for certain associated persons of the fund issuer to sell shares of the fund without being registered as a broker or dealer. However, several criteria must be met in order to qualify for the exemption. Most officers, directors, and employees of a fund’s general partner and investment adviser can meet the qualifications as long as they are not compensated based solely upon sales of the fund.