SEC looks into Carlyle’s monitoring fees

The US Securities and Exchange Commission (SEC) has recently requested information about The Carlyle Group’s historical monitoring fee acceleration practices, according to the private equity firm’s earnings 2015 report filed with the SEC on Friday.

The filing stated that the SEC inquiries were on “an informal basis” and that the firm is “cooperating fully with the SEC’s informal request.” The SEC declined to comment.

Portfolio companies pay their private equity owners an annual sum for ongoing management and advisory services, known as “monitoring fees.” Often these arrangements are structured as 10-year deals or longer. Typically an early exit from the company results in any unpaid monitoring fees “accelerating” to the private equity owner, even though the work no longer has to be performed.

The statement from Carlyle is reminiscent of a disclosure in a quarterly filing from The Blackstone Group last May, in which the firm indicated that it was “in discussions” with the SEC regarding historical monitoring fee termination practices. In October, Blackstone paid $39 million to settle charges with the regulator for failing to fully disclose its policies around accelerated monitoring fees.

In its filing, Carlyle also indicated some other activities that might be of interest for the SEC, for example, the use of (and compensation structure for) third-party advisors.

“While we believe we have made appropriate and timely disclosures regarding the engagement and compensation of these advisors, the SEC staff may disagree,” the filing stated.

Carlyle also raised the question of whether or not receiving fees from portfolio companies in connection with their acquisition, disposition or recapitalization designates the firm as a “broker-dealer” in the eyes of the SEC.

“To the extent we receive such transaction fees and the SEC takes the position that such activities render us a ‘broker’…we could be subject to additional regulation,” Carlyle noted.

If Carlyle were to be subject to SEC enforcement action, it would be the third large, publicly-traded private equity firm to be targeted by the regulator in the past year. Prior to Blackstone’s settlement in October, KKR agreed to pay nearly $30 million in June to settle charges alleging the firm had misallocated broken deal expenses.

“Even if a regulatory investigation or proceeding does not result in a sanction or the sanction imposed against us or our personnel by a regulator were small in monetary amount, the adverse publicity relating to such matters could harm our reputation,” the Carlyle filing noted. “In addition, our ability to accelerate such fees in the future could be affected.”

Carlyle was under no legal or regulatory obligation to disclose the SEC request, though many publicly traded private equity firms disclose SEC communication in their quarterly filings.