The US Securities and Exchange Commission has induced three private equity fund advisors in the Blackstone Group to agree to pay nearly $39 million to settle charges that they failed to inform investors fully about benefits that those advisors obtained from accelerated monitoring fees and discounts on legal fees.

Nearly $29 million of the settlement will be distributed to affected fund investors.

An SEC investigation found that Blackstone Management Partners, Blackstone Management Partners III and Blackstone Management Partners IV were not good enough at disclosing the acceleration of monitoring fees paid by fund-owned portfolio companies prior to the companies’ sale or initial public offering. The payments to Blackstone essentially reduced the value of the portfolio companies prior to sale, to the detriment of the funds and their investors. This, claims the SEC, was a dereliction of Blackstone's fiduciary duty to its customers.

The SEC investigation also found that fund investors were not informed about a separate fee arrangement that provided Blackstone with a much greater discount on services by an outside law firm than the discount that the law firm provided to the funds.

The SEC is taking this occasion to remind the regulated community that "full transparency of fees and conflicts of interest" is crucial to their conduct, although the regulator has a long history of exaggerating firm's legal duties.

According to the SEC’s accompanying order, Blackstone typically charges a monitoring fee to each portfolio company owned by its funds. The fee covers advisory and consulting services to the portfolio company and is for a ten-year period.

Before the private sale or initial public offering of certain portfolio companies, Blackstone terminated monitoring agreements and accelerated the payment of future monitoring fees, sometimes when monitoring services were to cease. It used some of the accelerated fee payments to offset management fees. It told investors that it was able to collect monitoring fees before those investors committed their capital but did not tell them about its habit of accelerating monitoring fees until after it took the fees.

Blackstone also failed to write down policies and procedures "reasonably designed to prevent violations of the Investment Advisers Act of 1940" and to follow them.