SEC Charges Private Equity Adviser for Failing to Disclose Disproportionate Expense Allocations to Fund

The Securities and Exchange Commission today charged New Jersey-based investment adviser Energy Capital Partners Management LP (ECP) with allocating undisclosed, disproportionate expenses to a private equity fund it advises. ECP agreed to pay a $1 million penalty to settle the SEC charges and has voluntarily paid back more than $3.3 million to the fund.

According to the SEC’s order, ECP led an investment consortium to acquire the stock of a public company in what is referred to as a take-private transaction. In connection with this transaction, which closed in March 2018, ECP agreed that third-party co-investors would not have to bear expenses related to a credit facility used to finance the transaction. As a result, the SEC’s order found that ECP allocated a disproportionate share of these expenses to a private equity fund it advised without disclosure. The SEC’s order found that, under the fund’s organizational documents, these expenses should have either been disclosed or not allocated in this manner.

"Private equity fund advisers must follow their own agreements and ensure that investors do not pay more in fees or expenses than they bargained for," said Adam S. Aderton, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. "This resolution ensures that investors are repaid, while reaffirming the SEC’s commitment to focus on misconduct in the private fund space, including that involving co-investor issues."

ECP consented to the entry of the SEC’s order finding that the firm violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 and 206(4)-8. Without admitting or denying the SEC’s findings, ECP agreed to a cease-and-desist order and censure, in addition to the $1 million penalty. 

The SEC’s investigation was conducted by David Zetlin-Jones of the Asset Management Unit, with assistance from Daniel Faigus of the Division of Examinations' Private Funds Unit, and supervised by Andrew Dean of the Asset Management Unit. The examination that led to the investigation was conducted by members of the Division of Examinations' Private Funds Unit and New York Regional Office, including Mr. Faigus and Dee-Ann DiSalvo.