Exclusive: SEC invited to ILPA member-only meeting

The Institutional Limited Partners Association (ILPA) has invited officials from the US Securities and Exchange Commission to a members-only meeting this week to discuss the regulator’s claim that approximately half of registered fund advisors are overcharging investors for certain expenses, pfm has exclusively learned. 

A source close to the commission said an SEC staffer is planning to attend. The SEC declined comment.

The LP trade body hopes to hold “fireside chats” with the SEC to determine what percentage of funds under scrutiny were formed prior to a list of best practice principles first published by the group in 2009, according to a source close to ILPA.

ILPA principles are used by LPs to guide the negotiation of favorable fund terms in the limited partnership agreement (LPA). The principles, which were updated in 2011, advocate that management fees “should encompass all normal operations of a GP” and any deal fees collected from portfolio companies “should accrue to the benefit of the fund”.

ILPA’s principles are widely credited for facilitating greater dialogue on fund expenses and fees during LPA negotiations, with GPs conceding more fees back to the fund and providing greater transparency on management and other fees. 

“We found a lot of the same issues the SEC found before the principles were published, so I wonder how big this fee problem is for funds with vintage years past 2011,” the source close to ILPA said. “I can tell you the principles have certainly had a healthy effect on interest alignment in the past three years.”

In a May 6 speech at the 2014 PEI Private Fund Compliance Forum, the SEC’s top inspector Andrew Bowden said hidden fees and expenses and vague disclosures became one of the agency’s top priorities as it completes a two year sweep of newly registered private fund advisors.

The speech has resulted in LPs launching their own probes into how GPs allocate expenses, as pfm previously reported.

One portfolio manager at a European insurer said he is holding more conversations with GPs about operating partner fees specifically.

He said the “best [way] to tackle [operating partner fees] would be to not allow the GP to appoint direct or indirect advisors, operational experts or any third party linked to the GP.” Instead he argues for a “separation of duties”, meaning it should be up to the portfolio company to decide if an outside advisor is needed. If not the GP may have to bear the cost, but certainly so if the advisor is working across multiple portfolio companies, he argued.

One of the industry’s biggest backers, the Oregon Investment Council (OIC), is also digging deeper into GPs’ fee practices. “We take seriously recent reports regarding the SEC’s investigations,” said OIC chairman Richard Solomon in a recent statement.