SEC’s Shipchandler: LPs, GPs improve at identifying conflicts of interest

  • LPs, firms better at spotting, disclosing conflicts
  • SEC cases against Fenway, Burrill targeted individuals
  • Charging individuals creates incentive to disclose more, says Shipchandler

LP advisory committees have grown more adept at spotting potential conflicts of interest posed by their fund managers’ relationships with third parties, said Shamoil Shipchandler, regional director of the SEC’s Fort Worth office.

Perhaps more important, GPs are doing a better job of disclosing these conflicts and the steps they’ve taken to mitigate them.

“We’re seeing the committees that vet those conflicts of interest being imbued with more authority, being given more information,” he said during a keynote Q&A at Buyouts’ PartnerConnect Southwest conference in Dallas.

Fee-and-expense allocations

While the SEC’s evidence on this remains anecdotal, “We are seeing an effect in the industry. We are seeing people much more robust in their disclosures,” he said.

“In a couple of the cases we’ve had, what we’ve seen is information either doesn’t get to the committee or the committee doesn’t take an active role,” he added.

The SEC’s private equity enforcement actions focused primarily on how firms allocate fees and expenses collected by general partners and their affiliates, and whether those practices were properly disclosed to fund investors.

A few cases, including a $10.2 million settlement reached with Fenway Partners, involved failure to disclose conflicts of interests posed when fees were collected by outside entities appointed or controlled by the firm itself.

In Fenway’s case, the SEC found the firm had “rerouted” roughly $20 million to a consulting firm that was 84 percent owned by current and former principals Peter Lamm, Gregg Smart and Timothy Mayhew.

Fenway Partners and its executives did not admit or deny the SEC’s findings. Lamm, Smart, Mayhew and Chief Financial Officer Walter Wiacek also settled without admitting or denying the findings.

Shipchandler noted that enforcement actions taken against individuals may have contributed to industrywide improvements around disclosures of potential conflicts.

The obligation to disclose those conflicts extends to outside fund auditors, who sign off on PE firms’ fee-and-expense practices.

Earlier this year, the eponymous founder of venture capital firm Burrill Life Sciences settled with the SEC after an investigation found he’d used his firm’s capital to prop up other businesses. The SEC also found Burrill had used the funds to pay for gifts, jewelry and private jets.

Burrill did not admit or deny the SEC’s findings in his settlement.

Later, the SEC followed up on those findings by levying separate charges against PricewaterhouseCoopers auditor Adrian Beamish, who allegedly signed off on Burrill’s fund audits despite being aware of the firm’s mismanagement of its fees.

The SEC publicly charged Beamish with failing to properly audit Burrill’s funds on Oct. 31. His case will be considered in an administrative hearing.

Individual responsibility

The SEC’s pursuit of charges against individuals, along with firms as a whole, creates additional incentive for investment professionals and other third parties to disclose or explain potential conflicts, Shipchandler said in his remarks.

“What we’ve done very well as a commission is make individuals responsible for not making those disclosures,” he said.

“We try to attack it both ways. One, the firm’s at risk, so the folks who look at those risks have that sense of responsibility. But two, the obligation is on the individual to provide that information because otherwise they will be held accountable as well.”

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Shamoil Shipchandler, regional director of the SEC’s Fort Worth office. Photo courtesy of the agency.