SEC registration reveals pub fight, fines

Along with financial fraud, the US Securities and Exchange Commission also apparently wants to protect limited partners from pub fights.

The SEC registration disclosure requirements, with which firms had to comply by 30 March, include detailed descriptions of any criminal or civil actions taken against the firm or certain employees in the past 10 years. Firms with less than $150 million of assets under management were exempted from registering.

Registration, which was mandated by US financial reform law Dodd-Frank, gives the SEC more oversight over firms, including the right to run inspections. The law seeks greater transparency for firms as a way to provide limited partners more information to make informed decisions.

Part of that enhanced transparency includes disclosure of disciplinary history, which has led to some awkward revelations about firms and their employees that, at least in one instance, appear to have no actual relation to the financial world.

Providence Equity Partners, for example, disclosed in its registration filing that one of its senior analysts was arrested and charged with felony assault in 2001. The senior analyst, who was 25 at the time and not a Providence employee, assaulted a senior citizen at a bar, according to court documents and a police report from the time.

The charge was reduced to a misdemeanor simple assault, and the analyst paid a $62 fine and served a year of probation, the court documents said.

“If one of your employees says, ‘yeah, I did something stupid and got charged with a crime’, the firm will typically turn over every rock to try and find a way to get out of reporting it,” said on Thursday Art Zwickel, a partner with law firm Paul Hastings. “It can be embarrassing to the firm, but the SEC determined investors should be aware of this kind of information.”

NOTHING NEW

Only certain employees trigger the need for disclosure of a past disciplinary action. Support staff, for example, would be excluded, according to SEC rules.

Disciplinary history disclosures are nothing new for this type of registration, but for the majority of private equity firms, registration with the SEC is a whole new world. Firms – in some cases for the first time –  have had to publicly disclose prior incidents.

Providence will be able to remove the disclosure about the senior analyst this year, as the incident will have occurred more than 10 years ago, said a person with knowledge of the matter. Providence declined to comment.

Another firm that included disclosure about past disciplinary action was Huntsman Gay Global Capital. Huntsman’s chief financial officer, Gary Crittenden, was accused by the SEC of filing misleading financial information during his time as a CFO with Citi about the bank’s exposure to subprime debt.

Crittenden paid a $100,000 fine and the case was resolved in 2010, according to the firm’s registration documents. Crittenden joined Huntsman Gay in 2009. The firm did not return requests for comment.

TPG Capital includes disciplinary actions taken against two senior advisors with the firm, former Dell CEO Kevin Rollins and former CEO of Banca Nationale Del Lavaro Davide Croff. TPG declined comment. 

Rollins, who has been with TPG since 2007, paid $4 million but admitted no wrongdoing for failing to adequately disclose a commercial relationship with Intel during his time at the helm of the company, according to the filing. Croff “negligently” failed to appropriately supervise a bond issue that defaulted in 2002 while he led the organisation. Croff appealed and lost but has the right to again appeal. Croff joined TPG in 2006.

GOOD FOR INVESTORS

The disclosures can help limited partners make more informed decisions about managers they want to back, according to the head of a private equity programme at a university endowment who is reviewing the registration filings for managers in the institution’s portfolio.

“Even in a situation where a relatively junior employee had an arrest 10 years ago, it gives me comfort knowing everything is being disclosed. If that’s the only thing that shows up, that’s great, they’re obviously being very thorough,” the LP said. “If I see something like that and I’m considering investing in the fund, that [charge] will have zero impact on me.”

More significant would be an old felony charge—say for drunk driving – against a senior executive at a firm, the endowment official said. “Even if it’s not financial related, it’s judgment and integrity related.”

The registration disclosures are a good thing for LPs and should become a part of every due diligence process, the LP said. “The real question is, I wonder how many people are actually reading them.”