White Collar

SEC Charges Private Equity Firm for Inadequate Fee Disclosures

By: Lucosky Brookman
SEC Charges Private Equity Firm for Inadequate Fee Disclosures


In a recent development that has caught the attention of the investment community, the U.S. Securities and Exchange Commission (SEC) has issued a settled Order against Prime Group Holdings LLC, a private equity firm. The SEC's Order focuses on the firm's failure to sufficiently disclose fees paid to an affiliate brokerage firm, wholly owned by the CEO of Prime Group.

The Core Issue

Prime Group initiated an investment fund exceeding $500 million in 2017, aimed at investing in self-storage real estate properties. To identify lucrative "off-market" deals, the firm employed a team of contractors and employees. These individuals were partially compensated through a 3% brokerage fee that Prime Group paid to a real estate brokerage firm, which was entirely owned by the CEO of Prime Group. Between 2017 and 2021, this affiliate brokerage firm received nearly $18 million in such fees.

Disclosure Shortcomings

Prime Group's Limited Partnership Agreement (LPA) included a section stating that the General Partner could engage any person, including affiliates, to provide services to the Fund. However, the SEC found this disclosure to be insufficient. The Commission emphasized that the affiliate's role was not occasional but a significant part of Prime Group's business model, and the affiliate received fees on the majority of the Fund's transactions.

Misleading Due Diligence Questionnaires

The SEC also took issue with the Fund's Due Diligence Questionnaires (DDQs), which misleadingly stated that all sourcing was done "internally" and omitted any mention of brokerage fees. These omissions were particularly glaring in customized DDQs that explicitly inquired about such fees and affiliates.

Legal Consequences

The SEC concluded that Prime Group violated Section 17(a)(2) of the Securities Act of 1933, a violation that doesn't necessitate recklessness or actual knowledge. As a result, without admitting or denying the allegations, Prime Group agreed to pay over $14 million in disgorgement and prejudgment interest, along with a $6.5 million civil penalty.

Implications for the Industry

The SEC's stance on this matter aligns with its current viewpoint on disclosures. The Commission considers any disclosure that merely suggests a "potential conflict" to be inadequate when an actual conflict exists. This case serves as a cautionary tale for private equity firms and underscores the importance of transparent and comprehensive disclosures.


The SEC's action against Prime Group serves as a stark reminder for private equity firms to be vigilant in their disclosure practices, particularly when affiliates are involved in fee structures. Failure to do so can result in significant legal and financial repercussions.

For further inquiries regarding SEC enforcement or issues related to private funds, feel free to contact the authors or your Lucosky Brookman LLP representative.