Private equity players snapped to attention earlier this year when the Securities and Exchange Commission notched its first big settlement against a smaller firm in the opaque industry, in what experts expect to be just the first of many enforcement actions as U.S. regulators continue to scrutinize private equity fee practices and a number of other hot topics.
Middle-market private equity firm Lincolnshire Management Inc. agreed in late September to pay $2.3 million to settle charges that it had inappropriately allocated expenses between two of its funds — breaching its fiduciary duty to both funds by inadequately allocating expenses in such a way as to benefit one fund over the other — and the case is leading others throughout that market to pore over the agreement for hints on how to avoid a similar fate.
Attorneys noted that many of the issues they come across with their clients don’t involve policy but rather implementation, as seen in the Lincolnshire case.
“Lincolnshire did have rules in place, but they weren’t well documented and they weren’t well followed,” said Howard Berkower, a partner with the corporate practice at McCarter & English LLP. “It really highlighted the need to get more into the details of how funds treat expenses.”