Compliance: Inside a recent SEC settlement

Many CFOs at private equity fund advisors also serve as CCOs. It’s important that someone wearing both hats receives quality supervision, as a settlement with the Securities and Exchange Commission involving Corinthian Capital Group ($248 million in assets under management) shows. The firm agreed to pay a $100,000 fine while its chief executive and founder Peter Van Raalte was ordered to pay $25,000 and its former CFO-CCO David Tahan agreed to pay $15,000.

The case touches on many of the compliance hot-button issues affecting private equity fund advisors, including expenses, fee offsets and custody. It grew out of an OCIE exam in 2014, but three years later, Corinthian’s auditor withdrew its unqualified opinion because the advisor had misclassified expenses.

It also missed its 120-day deadline to issue audited financials to investors for three years, which meant it violated the custody rule.

An LPA provision

The SEC focused its attention on a unique provision in the advisor’s fund’s limited partnership agreement, which permitted a “deemed contribution” for some LPs. The regulator said that the provision would allow some partners to skip 80 percent of a capital call and other investors would have to make up the difference. In exchange, the investors pouring in extra cash would get an offset against their management fees.

However, Tahan failed to apply a $1.2 million fee offset.

Van Raalte was considered at fault for not adequately supervising Tahan.

Another lesson from the settlement is that the increased complexity of LPAs means CFOs-CCOs have to be more careful. Provisions such as a deemed contribution suggest firms double-check their math to avoid errors and have policies and procedures to ensure they accurately implement such provisions.

The LPA’s provision didn’t grant the advisor the right to retroactively apply the deemed contribution provision. But Corinthian did, and in doing so, it neglected to apply the management fee offset.

The advisor also borrowed fund assets to satisfy a clean-up provision on a line of credit, even though its LPA didn’t contain a provision allowing loans.

PE expenses

The final point of interest for the SEC was the perennial PE topic of expenses. The regulator states the advisor “misclassified some expenses as organizational expenses and wrongfully charged them to the limited partners.” As a result, LPs overpaid $588,394.

“Van Raalte – who was aware that placement fees were not generally considered organizational expenses – failed to provide Tahan with adequate guidance and failed to review the expense classifications,” according to the SEC.

The commission credited the advisor for its co-operation and remediation, including repaying the fee offset and expenses with interest.

The firm’s current CCO, Gerson Guzman, told sister publication PF Watch the firm fixed the issues in 2015. “We fully co-operated with the SEC,” he added.