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From Securities Regulation Daily, October 7, 2015

Blackstone settles charges for failure to properly disclose fees and expenses

By Jacquelyn Lumb

The SEC’s Asset Management Unit found disclosure failures by three private equity fund advisers within the Blackstone Group during its ongoing review of private equity fees and expenses. In announcing the settled charges against Blackstone, Enforcement Director Andrew Ceresney said it was a significant case highlighting the importance of transparency with respect to the fees and expenses charged by private equity firms (In the Matter of Blackstone Management Partners, L.L.C, Release No. IA-4219, October 7, 2015).

Blackstone agreed to pay $39 million, which includes $26.2 million in disgorgement, $2.6 million in prejudgment interest, and a $10 million civil penalty. About $29 million of the settlement will be distributed to the affected fund investors. Ceresney said the settlement amount reflected Blackstone’s remedial acts and its cooperation with the Division during the investigation.

Background. The SEC found two distinct breaches of fiduciary duty by the Blackstone advisers. First, upon the private sale of a portfolio company or an initial public offering, the advisers terminated certain monitoring agreements and accelerated the payment of future monitoring fees. Blackstone disclosed that it may receive monitoring fees from the portfolio companies held by the funds it advised, and disclosed the amount of the fees that had been accelerated after the acceleration, but it did not disclose that it may accelerate future monitoring fees upon the termination of the monitoring agreements.

Second, Blackstone negotiated a legal services arrangement with its primary outside law firm on behalf of itself and the funds, but Blackstone received a discount that was significantly greater than the discount received by the funds. The disparate legal fee discounts were not disclosed to the funds or to the funds’ limited partners for a number of years. Because of the conflict of interest created by the receipt of accelerated monitoring fees and the legal fee discounts, Blackstone could not effectively consent to those practices on behalf of the funds it advised, which was a breach of its fiduciary duty.

Blackstone also failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act arising from its undisclosed receipt of fees and conflicts of interest.

Sanctions. In addition to the disgorgement and civil penalty, Blackstone consented to the entry of the SEC’s order without admitting or denying the findings, and agreed to cease and desist from further violations.

Ceresney would not comment on the scale of the Asset Management Unit’s investigations but noted that it is the SEC’s fourth in a series of fees and expenses cases involving Lincolnshire Management, Clean Energy Capital, LLC, and Kohlberg Kravis Roberts & Co. L.P. The Division has encouraged private equity fund advisers to self-report fee and expenses violations. Self-reporting is a significant factor in determining whether to grant cooperation credits. Blackstone voluntarily and promptly provided documents and information to the staff, according to the SEC’s order. The Blackstone entities will administer the disgorgement fund with SEC oversight.

The release is No. IA-4219.

Companies: Blackstone Management Partners L.L.C.; Blackstone Management Partners III L.L.C.; Blackstone Management Partners IV L.L.C.

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