On June 29, the Securities and Exchange Commission charged Kohlberg Kravis Roberts & Co. (KKR) with violations of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940, as amended, and Rule 206(4)-7 thereunder for the misallocation of broken deal expenses. The charge addressed KKR’s failure to disclose in its flagship funds’ offering materials that it did not attribute broken deal expenses to co-investor funds.
Rule 206(4)-7 provides that registered investment advisers need to adopt policies and procedures reasonably designed to prevent violations of the Advisers Act. In bringing this enforcement action, the SEC found that KKR violated Rule 206(4)-7 by not having policies and procedures governing its broken deal allocation practices. More broadly, the charge indicates the necessity of investment advisers having written allocation expense policies.