SEC sets it’s focus on private equity
The SEC took enforcement action via an order dated November 23, 2015 that JH Partners, LLC failed to disclose potential conflicts stemming from insider loans and a cross-fund investment, in addition to permitting violations of fund concentration limits. According to the order, JHP violated two sections of the Advisers Act of 1940: Section 206(2) prohibiting an investment adviser from participating “in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client,” and Section 206(4) prohibiting any “fraudulent, deceptive, or manipulative act, practice, or course of business by an investment adviser to an investor or prospective investor in a pooled investment vehicle.”
The SEC has amped up their regulatory focus on private equity as of late, and consistently emphasized the requirement of disclosing any and all conflicts of interest. The action taken against JHP stresses the significance of providing disclosure to limited partner advisory committees and advance LPAC approval of investments that may result in potential conflicts, different priorities in a portfolio company’s capital structure, and different valuations for respective investments and cross-fund investments.
General partnership liability (GPL) coverage often functions similarly to that of a corporate directors and officers’ policy, and can prove to be a valuable asset for private equity firms. However, the language must be clear and understood prior to language being set and coverage placed. Standard GPL policies cover litigation brought by limited partners, some employment related litigation, as well as government investigations and compliance actions brought by the SEC or other agencies. Coverage is also potentially available for suits by target companies, their management, or competing purchasers, in addition to various securities claims and outside directorship claims.
Despite all of the protections GPL coverage can offer, a comprehensive policy review is essential to check for exclusions. If any of their language is vague, such as those for coverage that violates public policy, ensure that these exclusions are clarified and made specific. A more comprehensive policy requires the insurance company to directly pay defense costs, rather than reimbursing the policyholders on a recurring basis. This process helps protect individual defendants if they cannot pay defense costs. Portfolio company bankruptcy is another risk that should be clearly stated within the policy.
About the Author
Peter Strong is an Area Senior Vice President of Gallagher WGA in the Broker Services Division and is a member firm’s area Private Equity practice. Mr. Strong has extensive knowledge with financial risks, including general partnership liability.