First Reserve pays $3.5m over fee allocations

Private equity firm First Reserve Management has agreed to a $3.5 million settlement with the Securities and Exchange Commission, according to an SEC filing.

The regulator charged the firm, which focuses on energy investments, with allegedly allocating expenses to funds without telling investors.

Funds involved in the allegations include, First Reserve Fund X, First Reserve Fund XI, First Reserve Fund XII, First Reserve Fund XII-A Parallel Vehicle, and First Reserve Fund XIII.

Some of First Reserve’s LPs in those funds include the California Public Employees' Retirement System, the California State Teachers' Retirement System, the Minnesota State Board of Investment, the Canada Pension Plan Investment Board, the Arizona State Retirement System and the third Swedish National Pension Fund AP3, according to PEI data.

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, but then 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. “As a registered investment adviser, First Reserve is subject to Advisers Act rules, including the requirement to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act and its rules… The nature of First Reserve’s business as a private equity fund adviser involves the allocation of expenses as between itself and its fund clients. Despite the potential risks of allocating such expenses inconsistently with disclosures to fund clients, First Reserve did not adopt and implement any written policies and procedures reasonably designed to prevent the above violations of the Advisers Act or its rules,” the SEC said in the filing.

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.

First Reserve Management is headquartered in Greenwich, Connecticut. The firm manages assets of over $12 billion for approximately twenty private fund clients, according to the filing. 

First Reserve declined to comment on the settlement.