September 7, 2023
What happened?
On September 5, 2023, the SEC charged private equity firm Prime Group Holdings LLC with “failing to disclose millions of dollars of real estate brokerage fees” that a fund managed by the firm paid to the firm’s affiliate. Prime Group did not admit or deny the SEC’s findings, but agreed to pay a total of $20.5 million to settle the charges: a $6.5 million civil penalty and over $14 million in interest and disgorgement, according to the SEC’s press release.
The SEC’s order alleged that the New York-based Prime Group started a real estate fund in 2017; some of the compensation for the firm’s employees and contractors came from a 3% brokerage fee that the fund paid on the contractors’ real-estate acquisitions. However, the SEC found that these brokerage fees were paid to a real-estate brokerage firm “that was wholly owned by Prime Group’s CEO,” without adequately disclosing in the fund’s offering documents that the fund would be paying these brokerage fees to the firm’s affiliate. The affiliate received almost $18 million in such fees over three years.
“Funds, including those that invest in alternative asset classes, must ensure that their offering materials contain clear, accurate, and adequate disclosures […] in particular, information related to payments made to affiliates, and the potential conflicts of interest embedded in such arrangements, is critical to investors’ decisions,” Chief of the SEC’s Enforcement Division’s Complex Financial Instruments Unit, Osman Nawaz, said.
What does this mean for me?
Disclosures and remediation may both be necessary to mitigate conflicts of interest. The SEC will continue to follow the money when it comes to client and investor assets. Whether it is payments to an affiliate, fees and expenses in agreements, or other forms of compensation, disclosure is necessary to allow clients and investors to make informed decisions and to meet a firm’s fiduciary duty to put the interests of clients and investors before those of the firm.
Fairview Investment Services provides comprehensive and ongoing compliance services, including comprehensive marketing and advertising review and complete examination support. Contact Fairview Investment Services for additional information about maintaining your compliance program in an ever-changing regulatory environment.
