News & Analysis

First Reserve settles with SEC over fee allocations

The SEC's allegations involve the private equity firm's 2006-vintage Fund XI which it attempted to restructure in the first half of the year.

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First Reserve, an energy-focused private equity firm, has agreed to a $3.5 million settlement with the US Securities and Exchange Commission, according to an SEC filing.

The regulator charged the firm with allegedly allocating expenses to funds without telling investors.

Five of First Reserve’s funds were involved in the allegations, including its 2006-vintage $7.8 billion First Reserve Fund XI, which the firm attempted to restructure in the first half of the year. In that process, Intermediate Capital Group and Pantheon offered to buy stakes from limited partners at close to par to 31 March net asset value, and the deal fell apart in August when not enough LPs wanted to sell their stakes.

Among the SEC’s allegations is that First Reserve negotiated discounted legal fees with a law firm based on the large amount of work it was doing for the funds, and did not pass on these discounted rates to the funds. The SEC also allege that First Reserve allocated the cost of paying certain liability insurance premiums – which did not related entirely to the funds – to the funds, according to the filing.

The SEC states that the firm’s failed compliance program allowed the conflicts to continue.

Alongside the settlement, First Reverse reimbursed investors over $7 million following discovery of the conflicts during an SEC exam in June last year.

“Reimbursing investors after the SEC staff accuses your firm of wrongdoing won’t avoid an enforcement action or fines,” Todd Cipperman, founding principal of Cipperman Compliance Services said in an emailed note to clients. “Private equity firms must implement a robust compliance program that proactively uncovers, reports, and remedies conflicts of interest.”

First Reserve’s settlement follows that of Apollo Global Management, which agreed to pay the commission $52.7 million to settle fees-related charges in August, and WL Ross & Co, which agreed to a $2.3 million civil penalty for allegedly failing to disclose the method used to allocate certain fees it charges investors, in the same month.