The Securities and Exchange Commission (SEC) announced that four private equity fund advisers affiliated with Apollo Global Management agreed to a $52.7 million settlement for misleading fund investors about fees and a loan agreement, and failing to supervise a senior partner who charged personal expenses to the funds.

Key Takeaways

Investment advisers should note the following:

  • You cannot accelerate fees owed to you as an adviser unless clients consent to this practice. For a private fund, this means the ability to accelerate fees must be clearly spelled out in the fund’s offering documents.
  • You must disclose the manner in which financial actions by a fund, like entering into a loan, will benefit you as an adviser. In this regard, disclosure in financial statements matters.
  • When you assess a penalty for violation of compliance policies and procedures, you may need to make it more severe that a slap on the hand, or the SEC might view your policies as being inadequate.

Summary

Acceleration of Fees. Apollo entered into certain agreements with portfolio companies that were owned by Apollo-advised funds (monitoring agreements). Pursuant to the terms of the monitoring agreements, Apollo charged each portfolio company an annual fee in exchange for rendering certain consulting and advisory services to the portfolio company concerning its financial and business affairs (monitoring fee). From at least December 2011 through May 2015, upon either the private sale or an initial public offering (IPO) of a portfolio company, Apollo terminated certain portfolio company monitoring agreements and accelerated the payment of future monitoring fees provided for in the agreements.

Although Apollo disclosed that it may receive monitoring fees from portfolio companies held by the funds it advised, and disclosed the amount of monitoring fees that had been accelerated following the acceleration, Apollo failed adequately to disclose to its funds, and to the funds’ limited partners prior to their commitment of capital, that it may accelerate future monitoring fees upon termination of the monitoring agreements.

Because of its conflict of interest as the recipient of the accelerated monitoring fees, Apollo could not effectively consent to this practice on behalf of the funds it advised.

Financial Statement Disclosure Regarding Loan Agreement Inadequate. In June 2008, Apollo Advisors VI, L.P. (Advisors VI) — the general partner of Apollo Investment Fund VI, L.P. (Fund VI) — entered into a loan agreement with Fund VI and four parallel funds (collectively, the Lending Funds). Pursuant to the terms of the loan agreement, Advisors VI borrowed approximately $19 million from the Lending Funds, which was equal to the amount of carried interest then due to Advisors VI from the Lending Funds. The loan had the effect of deferring taxes that the limited partners of Advisors VI would owe on their respective share of the carried interest until the loan was extinguished.

Accordingly, the loan agreement obligated Advisors VI to pay interest to the Lending Funds until the loan was repaid. From June 2008 through August 2013, when the loan was terminated, the Lending Funds’ financial statements disclosed the amount of interest that had accrued on the loan and included such interest as an asset of the Lending Funds. The Lending Funds’ financial statements, however, did not disclose that the accrued interest would be allocated solely to the capital account of Advisors VI.

The failure by Apollo Management VI, L.P., the Fund VI investment adviser, to disclose that the accrued interest would be allocated solely to the account of Advisors VI rendered the disclosures in the Lending Funds’ financial statements concerning the loan interest materially misleading.

Officer’s Violations of Compliance Policies and Procedures. From at least January 2010 through June 2013, a former Apollo senior partner (Partner) improperly charged personal items and services (collectively, personal expenses) to Apollo-advised funds and the funds’ portfolio companies. In certain instances, the partner submitted fabricated information to Apollo in an effort to conceal his conduct. In other instances, the personal expenses on their face appeared to have a legitimate business purpose.

Notwithstanding his efforts to conceal his conduct, in October 2010, the partner’s then-administrative assistant became suspicious of his expense reports and reported the issue to an Apollo expense manager, who reviewed the partner’s expenses for the prior six months and discussed them with the partner. Subsequently, in November 2010, the partner admitted that he had improperly charged certain personal expenses and reimbursed Apollo. In response, Apollo verbally reprimanded the partner.

Despite the partner’s conduct and Apollo’s Travel and Expense Reimbursement Policies and Procedures (T&E Policies and Procedures), which explicitly state that certain types of charges for which the partner sought reimbursement are non-reimbursable, Apollo did not take any additional remedial or disciplinary steps in response to the partner’s expense reimbursement practices.

In early 2012, based on renewed suspicions, Apollo initiated a second review of the partner’s expenses for the prior six months. In May 2012, as a result of this second review, the partner again reimbursed Apollo for certain personal expenses that he improperly charged. While Apollo issued another verbal reprimand to the partner and instructed him to stop submitting personal expenses for reimbursement, Apollo did not take any other remedial or disciplinary steps at that time, or further supervise the partner.

In August 2012, Apollo, on its own initiative, engaged outside counsel, which then engaged an independent audit firm, to conduct a firmwide review of expense allocations. As part of this review, Apollo requested that the independent audit firm review the partner’s reimbursement practices. In June 2013, the independent auditor singled out the partner’s expense reports for further review, which entailed an in-depth examination of the partner’s expenses, as well as the partner’s emails and calendar entries.

On July 1, 2013, Apollo’s internal and outside counsel met with the partner concerning his expenses. During that meeting, the partner acknowledged that he had improperly charged a number of personal expenses. As a result, Apollo placed the partner on unpaid leave.

On July 8, 2013, Apollo’s outside counsel retained an accounting firm — at the partner’s expense — to conduct a forensic review of the partner’s expenses from January 2010 to June 2013. That review revealed additional personal expenses that the partner improperly charged to Apollo-advised funds and the funds’ portfolio companies.

Apollo thereafter voluntarily reported the partner’s expense issues it had discovered to the staff of the commission.