SEC drops senior adviser fee issue in final settlement with First Reserve

  • SEC drops fee issue it had highlighted in proposed settlement
  • Said fees portfolio companies paid to senior advisors should have been offset
  • Final settlement included smaller fine

First Reserve agreed to a settlement with the SEC over issues of fees and expenses that was smaller than proposed earlier this year — possibly because one issue described in the earlier proposal was dropped.

Earlier, the SEC said certain fees paid by First Reserve portfolio companies to senior advisers should have been offset against the management fee. That would have required the firm pay back limited partners $4.4 million, according to the proposed settlement, a person with knowledge of the proposal told Buyouts in May. It’s not clear whether First Reserve made any sort of reimbursement.

In all, the earlier proposed settlement would have required First Reserve to pay a $5 million fee, along with $12.7 million in LP reimbursements. Instead, First Reserve agreed to pay a $3.5 million fine. The firm had already paid out more than $8.3 million in reimbursements, according to the SEC’s order.

Judith Burns, spokeswoman for the SEC, and Julie Oakes, spokeswoman for First Reserve, declined to comment.

The agency’s findings arose from a 2014 examination, the SEC said. The agency has been on a tear this year, winning settlements with WL Ross & Co., Blackstreet Capital Management, and, in its largest settlement yet, with Apollo Global Management for $52.7 million.

The agency also is investigating Silver Lake over accelerated monitoring fees, both the Wall Street Journal and Buyouts have reported. The agency subpoenaed California Public Employees’ Retirement System, a Silver Lake LP, for communications about accelerated monitoring fees, management fee offsets and co-investments, Buyouts reported.

The settlement

The biggest part of the First Reserve settlement — both the earlier proposed version and the final version — centered on a joint venture earmarked to invest in smaller oilfield equipment and services opportunities.

First Reserve Momentum was created by the firm and executives from Petrofac, an oilfield-services company. First Reserve Funds XII and XII-A kicked in about $40 million to the joint venture and own about 75 percent, the SEC said.

The SEC accused First Reserve of not properly disclosing that it had charged Fund XII and Fund XII-A LPs operational expenses of two adviser entities created to work with First Reserve Momentum. More than $7 million of the $40 million investment was used for operational expenses such as rent, utilities and salaries, as well as costs associated with the formation of the adviser entities, such as regulatory registration costs, the SEC said.

In June 2015, the firm voluntarily reimbursed LPs more than $7.4 million over the issue, the SEC said.

The SEC also accused First Reserve of charging LPs for liability insurance premiums for issues not entirely related to fund management, which fell outside the parameters of the limited partner agreements; and for taking legal fee discounts not available to the funds without proper disclosure or consent from the funds, the SEC said.

For the insurance premiums, First Reserve retroactively reimbursed Funds X, XI, XII, XII-A and XIII a total of $733,012 for the firm’s share of insurance premiums for prior coverage periods, the SEC said.

For the legal fee discount, the firm voluntarily paid out $179,466 attributable to the legal fee discount to Funds X, XI, XII, XII-A and XIII, the SEC said.

The firm also plans to pass on any future discounts it receives from a law firm to any active funds pro rata based on committed capital during the period of the discount, SEC said.

Action Item: Check out the SEC order here:

The U.S. Securities and Exchange Commission logo on an office door at the agency’s headquarters in Washington on June 24, 2011. Photo courtesy Reuters/Jonathan Ernst