The SEC Cracks Down on Illegal Activity: Demanding Transparency from Investment Professionals

By Majda Muhic, Fall 2016 Student Intern

In fiscal year 2016, the Securities and Exchange Commission’s enforcement activities targeted, in part, misconduct by investment advisers and companies. The SEC brought a total of eight enforcement actions related to private equity advisers in fiscal year 2016, for a total of eleven private equity-related actions in the last two years. While the range of SEC’s charges varied, all revealed a commitment to protect investors from self-interested conduct of investment professionals and to demand full transparency in their dealings. 

In one of these actions, the SEC found that three private equity advisers of The Blackstone Group failed to properly disclose to investors a) the benefits the advisers received from accelerated monitoring fees, and b) the discount Blackstone was receiving on legal fees. These failures to disclose cost the company nearly $39 million. Blackstone agreed to distribute $29 million of the nearly $39 million settlement directly to the affected fund investors.  Four private equity fund advisers affiliated with Apollo Global Management were similarly charged for misleading investors about benefits received from accelerated monitoring fees and about a loan agreement. The advisors were further charged with failing to supervisor a partner who expensed personal items to the funds, without impunity. These violations have cost the advisers $52.7 million.

The SEC repeatedly sanctioned self-interested conduct of investment professionals, from individuals to companies: three AIG affiliates were sanctioned for steering clients toward more expensive products to collect higher fees; Aequitas Management LLC and a number of its executives were charged with hiding the rapidly deteriorating financial condition of the firm while raising money from investors. Misinformation – and misleading investors – again stands at the center of these charges. The SEC went as far as to sanction thirteen investment advisory firms for repeating false claims made by an investment management firm about one of its products without finding out enough to support these claims. Their own failure to be adequately informed in this case did not protect the firms from liability. All thirteen firms were found to have violated securities laws.