The Broken-Deal Expense Is a Fiduciary Question.

A deal dies in diligence. The legal fees, the advisory work, the diligence and travel costs are already spent, and the money has to come from somewhere — the fund, the general partner, or the co-investors who were going to invest alongside it. Booking the expense is the simple part; the regulatory question is whether the split the firm chooses was permitted, fairly determined, adequately disclosed, and governed by an adopted compliance policy.

Where the cost can land

A broken-deal expense can fall on the fund, on the general partner, or be shared with co-investors, and which of those is correct is not a matter of instinct. It depends on the fund's governing documents, the disclosures made to investors, the participation structure, and the allocation methodology the firm has adopted — not on a general sense that whoever might have shared the upside should share the cost. Two funds with different documents can correctly reach different answers on the same invoice.

That makes the allocation a written question rather than a reflex. The firm needs a methodology it can point to, consistent with what the partnership agreement and offering documents permit and with what investors were told, and it needs to apply that methodology the way it described. Booking the cost takes a moment. Getting the allocation right is where the firm's judgment, its disclosures, and its own promises all have to agree.

What the SEC charged KKR with

The case that set the stakes is the SEC's 2015 action against KKR, the first time the agency charged a private equity adviser over broken-deal expenses. Over roughly six years ending in 2011, KKR incurred about $338 million in broken-deal and diligence costs on transactions it pursued and did not complete. It charged those costs almost entirely to its flagship private equity funds, while co-investment vehicles drawing on the same deal sourcing — including vehicles established for KKR executives — bore almost none of them. The SEC found that about $17.4 million had been misallocated to the funds, that KKR had not disclosed this practice to the funds' investors, and that it had no written policy governing how the expenses were to be split.

KKR settled for nearly $30 million, including a $10 million penalty, under Sections 206(2) and 206(4) of the Investment Advisers Act and Rule 206(4)-7. The order did not turn on whether the expenses were real. The breach arose from how they were allocated and what investors had — and had not — been told: the funds were charged while co-investors that benefited from the same sourcing activity bore almost none, and that treatment was not disclosed. An expense can be entirely legitimate and its allocation still breach fiduciary duty.

No formula to hide behind

For a moment it looked as though a bright line would replace all of this judgment. The SEC's 2023 private-fund adviser rules would have restricted non-pro-rata allocations of expenses related to an investment or potential investment shared among multiple funds or clients, unless the allocation was fair and equitable and disclosed to investors in advance. In June 2024 the Fifth Circuit vacated those rules in full, holding that the SEC had exceeded its authority, and that requirement went away with them.

What did not go away is the older, broader duty the KKR case rested on. Registered advisers remain subject to the Advisers Act's antifraud provisions and to Rule 206(4)-7's requirement to adopt and implement written compliance policies reasonably designed to prevent violations. Those duties supply no formula. They ask a harder set of questions: is the allocation permitted by the fund's documents, is it consistent with what investors were told, and did the firm follow the methodology it wrote down.

So the real exposure on a dead deal is not the size of the bill but whether the way the firm split it can be squared with the fund's documents, the disclosures made to investors, and the policy the firm adopted for exactly this situation — a question the invoice never raises and the fund's own promises always do.