SEC Settles With 71 Municipal Issuers

The Commission’s Municipalities Continuing Disclosure Cooperation Initiative has been a significant success. Under the Initiative the agency has filed settled enforcement actions against firm’s representing 96% of the market share for municipal underwritings, improving future disclosures in the market for investors. Yesterday the SEC settled with an additional 71 issuers.

The Initiative is a voluntary self-reporting program focused on material misrepresentations and omissions in municipal bond offering documents. The Commission’s 2012 Municipal Market Report identified the failure of issuers to comply with their continuing disclosure obligations as a significant issue for investors. The Initiative focuses on this point and encourages issuers to self-report in return for favorable settlement terms for underwriters, issues and obligated persons.

The cases filed yesterday involved 71 issuers and obligated persons in 45 states who sold municipal bonds using offering documents that contained materially false statements or omissions about their compliance with continuing disclosure obligations. Under those obligations investors receive annual financial reports on an ongoing basis.

Each of the settling issuers consented to the entry of a cease and desist order and agreed to certain undertakings designed to prevent a reoccurrence of the conduct in the future. Typical of the settled actions filed yesterday is the proceeding involving the City of Alameda, California. In the Matter of the City of Alameda, Ad. Proc. File No. 3-17421 (August 24, 2016). There the Order alleged that in certain official statements for municipal securities the Respondent affirmatively stated that it had materially complied with prior agreements to provide continuing disclosure when in fact it had not. The Order alleged violations of Securities Act Section 17(a)(2). To resolve the proceeding the City consented to the entry of a cease and desist order based on the Section cited in the Order. It also agreed to comply with certain undertakings which require the City to establish appropriate written policies and procedures, have periodic training regarding its continuing disclosure obligations, update past delinquent filings and certify compliance with the undertakings.

Under the Initiative the SEC has now filed 143 settled actions against 144 Respondents.

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SEC Charges Private Equity Advisers With Inadequate Disclosure

The Commission has brought a series of cases against private equity centered on undisclosed fees and conflicts of interest – key areas of interest during OCIE exams. The latest proceeding in this string of cases involves four private equity advisers whose parent is Apollo Global Management, LLC which has about $170 billion under management. Its shares are traded on the New York Stock Exchange. In the Matter of Apollo Management V, L.P., Adm. Proc. File No. 3-17409 (August 23, 2016).

The proceeding centers on inadequately disclosed fees, a failure to fully disclose the terms of a loan agreement and inadequate supervision. Respondents are Apollo Management V, L.P., Apollo Management VI, L.P., Apollo Management VII, L.P. and Apollo Commodities Management, L.P. Each is a private equity fund adviser registered with the Commission as an investment adviser. The parent of each is Apollo Management V.

Respondents have advised multiple private equity funds. Each is governed by a limited partnership agreement. In each instance a management fee equivalent to about 1.2% of capital under management – reduced by certain credits – is charged. The general partner of each Fund is entitled to 20% carried interest on all distributions made by the Fund after contributed capital and a hurdle rate of 8% has been returned to limited partners.

Each Apollo-advised fund owns multiple portfolio companies. Typically, Respondents enter into monitoring agreements with each portfolio company that is owned by an Apollo advised fund. Those agreements provided that Apollo can charge certain portfolio companies monitoring fees in exchange for rendering certain consulting and advisory services to the portfolio companies regarding their financial and business affairs. While the monitoring fees are in addition to the other fees charged, there are certain credits. The agreements typically run for ten years.

The monitoring fees can be accelerated if certain events occur. Those typically include a private sale or IPO of a portfolio company. Under those circumstances Respondents can terminate the monitoring agreement, accelerate the remaining years of fees and receive a present value lump sum termination payment.

Respondents disclosed certain fees and Special Fees. They did not adequately disclose their practice of accelerating monitoring fees until after the limited partners had committed capital to the Funds and the accelerated fees had been paid. Since Respondents have a conflict of interest as the recipient of the accelerated fees, they cannot effectively consent for the funds.

In June 2008 the general partner to Fund VI, Advisors VI, entered into a loan agreement with Fund VI and four parallel funds which were the Lending Funds. The Lending Funds advanced Advisors VI about $19 million – the amount of carried interest due to Advisors VI from certain transactions. The loan deferred taxes. Despite the terms of the loan agreement and the related disclosures showing that the interest income from the loan was accruing, the Lending Funds’ financial statements failed to disclose that the accrued interest would be allocated to the capital account of Advisors VI. This made the disclosures about the loan and interest payments materially misleading.

Finally, from January 2010 through June 2013 a former senior partner of Respondents improperly charged personal items and services to advised funds. After repeated instances and an internal investigation Respondents reported the conduct to the Commission. The Order alleges violations of Advisers Act Sections 206(2) and 206(4).

To resolve the proceeding Respondents consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Respondents will pay disgorgement of $37,527,000 and prejudgment interest which will be paid to a disgorgement fund. They will also pay a penalty of $12,500,000 and acknowledge that the amount was limited to that sum based on their cooperation.

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