Andrew Ceresney, Director, SEC Division of Enforcement, gave his views on the SEC private equity enforcement initiative at a conference.

Mr. Ceresney set forth the various categories of enforcement cases, which at this point are well known. The categories include cases against:

  • Advisers that receive undisclosed fees and expenses;
  • Advisers that impermissibly shift and misallocate expenses; and
  • Advisers that fail to adequately disclose conflicts of interests, including conflicts arising from fee and expense issues.

Perhaps more interesting are Mr. Ceresney’s views regarding a number of arguments advanced by the private equity fund advisers that the SEC has ultimately found unavailing. According to Mr. Ceresney:

“First, some potential defendants have argued that it is unfair to charge advisers for disclosure failures in fund organizational documents that were drafted long before the SEC began its focus on private equity and before many advisers were required to register. But, although private equity fund advisers typically did not register until after Dodd-Frank was enacted, they have always been investment advisers and subject to certain provisions of the Investment Advisers Act. All investment advisers, whether registered or not, are fiduciaries and are subject to the Advisers Act antifraud provisions.

Second, potential defendants have argued that, even if the adviser failed to disclose a conflict of interest, the investors benefited from the services provided by the adviser. While this may be a factor to consider when assessing any potential remedy, it is not a relevant argument for assessing liability. As a fiduciary, an investment adviser is required to disclose all material conflicts of interest so that the client can evaluate the conflict for itself. The fact that a conflicted transaction or practice might arguably benefit the client simply does not relieve an adviser of its duty to inform and obtain consent.

Third, some advisers have pointed to advice they received from counsel, for example in connection with disclosures to investors. The involvement of counsel varies in each case, and assuming the adviser waives the privilege and discloses the advice completely, we will consider this advice in evaluating the appropriateness of an action and the remedies we will seek. However, the adviser is still ultimately responsible for its conduct — including its disclosures of conflicts to its clients — and cannot escape liability simply by pointing to the actions of counsel.”