On September 22, 2023, the SEC imposed sanctions, including an aggregate fine of $1,645,460, on American Infrastructure Funds, LLC (AIM) for certain violations of its fiduciary duty to its private fund clients. AIM is a private equity adviser based in Foster City, CA and its clients are private funds that make investments in infrastructure and real property-based assets and businesses. AIM has approximately $1.3b in assets under management and has been registered with the SEC as an investment adviser since 2012.
The SEC found that AIM breached its fiduciary duty to its clients in three distinct ways:
- AIM violated its fiduciary duty entering into an agreement under which it accelerated a portfolio company monitoring fee without timely disclosure to clients or investors.
- AIM transferred an asset owned by AIM-advised funds to a newly-formed private fund that AIM also advised without adequately disclosing its conflicts of interest, obtaining investor consent, or allowing investors to liquidate or exit their investment at the end of certain funds’ term.
- AIM made an AIM-advised fund incur expenses that should have been paid by a fund advised by an affiliated adviser. AIM violated its duty of care obligations by allowing this transaction, which had the practical effect of an undisclosed loan to the fund advised by the affiliated adviser.
Further, AIM also failed to implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder in connection with its receipt of compensation from portfolio companies and transfers of fund assets.
https://www.sec.gov/files/litigation/admin/2023/ia-6428.pdf
Salus GRC Takeaways:
- The SEC will continue to focus on an adviser’s fee and expense processes on exams of private equity advisers. Additionally, this action highlighted the SEC’s increased focus on potential conflicts regarding the use of continuation funds, an increasingly common practice in the private equity space.
- Private equity advisers should consider undertaking a targeted review of its existing fee and expense allocation procedures, particularly with respect to their underlying portfolio companies.
- Under the quarterly statement requirement mandated by the SEC’s new Private Funds Rule, advisers should carefully review and document their fee and expense practices prior to disclosing these items in these required quarterly statements.
- Further, advisers should engage for an independent review of potential conflicts of interest in their investment and operations practices and determine ways to mitigate these potential conflicts of interest.
- Advisers should also undertake a comprehensive review of their current policies and procedures to ensure that these policies are in line with industry best practices in the rapidly involving regulatory landscape.
- Further, advisers should also consider engaging for a detailed books and records review to determine whether their current recordkeeping practices are in line with industry standards.
Please contact Salus GRC with your questions and concerns related to these matters, an active or potential SEC exam or the current governance, risk and compliance landscape for investment advisers.