Neuberger settles with SEC over improper expenses in Dyal funds

  • SEC charges involved payment to in-house consulting team
  • Includes $375,000 civil penalty
  • Firm wrapping up fundraising on Fund IV

Neuberger Berman settled with the SEC over improper fees charged to investors in the firm’s Dyal Capital funds, which buy minority stakes in private investment firms.

Neuberger Berman agreed to disgorge just over $2 million along with $284,620 in interest, and pay a $375,000 civil penalty, according to the SEC’s settlement order. Neuberger Berman did not admit or deny wrongdoing.

“We are pleased to resolve this matter and remain committed to conducting our business in a manner that is transparent and fully consistent with the highest standards of our investors and regulators,” Neuberger said in a statement.

The charges involve payment to an in-house group of employees called the Business Services Platform. This group provided “client development, talent management, operational advisory and other services, support and advice” to the firms in which Dyal invested, the order said.

Under the terms of three Dyal funds raised from 2011 to 2016, the funds paid expenses relating to use of the BSP consulting group up to a cap of 50 basis points of committed capital for each fund, the order said.

Neuberger, rather than the funds, was responsible for paying the employees for work done outside the Business Services Platform, the SEC order said.

Some BSP employees spent a portion of their time on work outside the scope of BSP, on things like raising capital for Dyal funds and meeting potential investment targets, the order said. Payment for that work should have been borne by Neuberger Berman rather than by the Dyal funds, SEC said.

Neuberger did not adjust compensation-related expenses the funds paid to those employees for BSP work, the order said. “By doing so, [Neuberger Berman Alternatives Advisors] breached its fiduciary duty to the funds,” the SEC order said.

Because of this, of the $28.7 million the Dyal funds paid in expenses to BSP employees from 2012 to 2016, about $2 million, or 7 percent, was paid for time not spent on BSP work, SEC said.

Further, Neuberger did not disclose to fund investors that some BSP employees were being paid by the funds for work not related to BSP, SEC said.

After SEC staff began looking into the issue in 2017, Neuberger ensured that BSP employees worked exclusively within the scope of the BSP mandate, SEC said. Improper allocation of BSP expenses stopped in 2017, SEC said.

Dyal has raised three funds and is in market with its fourth pool targeting $5 billion. Michael Rees, head of Dyal, said in October at Buyouts Insider’s PartnerConnect West event that he expected Fund IV to close on more than $5 billion by year-end.

Dyal closed its third fund on $5.3 billion in February 2017, more than doubling its original $2.5 billion target.

Action Item: Check out the SEC order here: