Private Equity Firm American Infrastructure Funds Popped
The importance of transparency and the fiduciary duty
The Securities and Exchange Commission (SEC) has announced that American Infrastructure Funds LLC (AIM), a registered investment adviser based in Foster City, California, has agreed to pay more than $1.6 million to settle charges brought against it. These charges are related to several violations, including the acceleration of portfolio company monitoring fees, transferring a private fund asset from funds nearing the end of their term to a new fund, and loaning money from one private fund to another private fund advised by an affiliate.
Here are the key points from the SEC's announcement:
1. **Accelerated Monitoring Fees**: AIM was charged with breaching its fiduciary duty to the private funds it advised by failing to adequately disclose its conflict of interest in receiving accelerated monitoring fees from a portfolio company when that company was sold. The SEC found that AIM violated its duty of care by not considering whether the fee acceleration was in the best interest of its clients.
2. **Transfer of Assets**: AIM was found to have breached its fiduciary duty by transferring assets from certain expiring funds to a new private fund that it also advised. This action effectively locked up investor money for an extended period (at least a decade) without obtaining investor consent, providing existing investors an option to exit, or adequately disclosing conflicts of interest in the transaction.
3. **Loan Between Funds**: AIM was charged with breaching its fiduciary duty by loaning money from one private fund it managed to a new private fund managed by an affiliated adviser. The SEC found that AIM did not adequately disclose its conflict of interest in this loan arrangement and failed to undertake a process to determine if the loan was in the best interest of its clients.
4. **SEC's Response**: The SEC emphasized its commitment to holding private fund advisers accountable when they fail to act in the best interests of their clients. The SEC's Co-Chief of the Enforcement Division's Asset Management Unit, Corey Schuster, highlighted AIM's failure to disclose conflicts of interest as a significant issue in this case.
5. **Penalties and Settlement**: AIM agreed to a cease-and-desist order and censure, without admitting or denying the SEC's findings. As part of the settlement, AIM agreed to pay a penalty of $1.2 million, as well as $445,460 in disgorgement and prejudgment interest to investors.
This case underscores the importance of transparency and the fiduciary duty that investment advisers owe to their clients. It serves as a reminder that the SEC takes violations of these duties seriously and will take enforcement action when necessary to protect investors.
Notes:
SEC Charges Private Equity Fund Adviser American Infrastructure Funds for Breaching Its Duties