SEC Imposes Fine on Prime Group for Inadequate Disclosure of Affiliate Fees

The Securities and Exchange Commission (SEC) has taken action against Prime Group Holdings LLC, a private equity firm specializing in alternative real estate asset classes, for its failure to adequately disclose millions of dollars in real estate brokerage fees paid to a brokerage firm owned by its CEO. Prime Group has agreed to resolve the charges by paying a substantial penalty totaling $20.5 million.

According to the SEC's order, Prime Group, headquartered in Saratoga Springs, New York, launched an investment fund in 2017 with the aim of acquiring self-storage real estate properties. The investigation revealed that the fund primarily relied on deal teams consisting of Prime Group employees and independent contractors to identify and purchase "off-market" properties. The costs, compensation, and other expenses associated with Prime Group's operations, including the deal teams, were partially funded by a three percent brokerage fee paid by the fund for the acquisitions. Notably, the order found that these brokerage fees were directed to a real estate brokerage firm entirely owned by Prime Group's CEO, thus designating the brokerage firm as an affiliate of Prime Group.

The SEC contended that Prime Group made misleading statements in the fund's offering materials, including the limited partnership agreement, private placement memorandum, and due diligence questionnaires. These documents failed to sufficiently disclose that an affiliate (the CEO's brokerage firm) would be the beneficiary of these real estate brokerage fees. Over the period from 2017 to 2021, the affiliated real estate brokerage firm received nearly $18 million in brokerage fees upon the closing of the fund's property acquisitions.

Osman Nawaz, Chief of the SEC's Enforcement Division's Complex Financial Instruments Unit, emphasized the importance of clear, accurate, and adequate disclosures in the offering materials of funds, especially those investing in alternative asset classes. He highlighted that information concerning payments to affiliates and the potential conflicts of interest inherent in such arrangements is critical for investors in making informed decisions.

The SEC's order determined that Prime Group violated Section 17(a)(2) of the Securities Act of 1933. While Prime Group did not admit or deny the SEC's findings, it agreed to a cease-and-desist order, which prohibits further violations of the charged provision. Additionally, Prime Group has consented to pay a total of $20.5 million in penalties, disgorgement, and interest as part of the settlement.

This enforcement action underscores the SEC's commitment to transparency and ensuring that investors receive accurate and comprehensive information regarding fees and potential conflicts of interest in investment offerings.