The SEC’s Evolving Scrutiny of Private Equity Firms: KKR Hit with an Unprecedented Enforcement Action for Broken Deal Expense Misallocation

Abstract

Purpose – To explain and analyze SEC charges and settlement with Kohlberg Kravis Roberts & Co. (“KKR”) related to misallocation of broken deal expenses. Design/methodology/approach – Provides background, including other similar SEC enforcement actions in relation to private equity and hedge funds; explains the regulatory violations in KKR’s broken deal allocation methodology and related disclosure; draws lessons and makes recommendations for private equity firms concerning the need for compliance and disclosure reviews and the benefits of remediation and cooperation. Findings – This enforcement action and other similar ones represents a continuing SEC focus on fee and expense misallocation. It is also relevant to advisers to real estate and hedge fund complexes that face similar allocation issues. Practical implications – Private equity firms and other advisers to private investment funds should re-evaluate their fee and expense allocation policies and procedures to be sure that they adhere to current regulatory and investor expectations. Originality/value – Practical guidance from experienced securities enforcement and litigation and investment management lawyers.