Read

SEC Brings Case Against a Private Equity Firm For Miscalculating Fee Offsets

Background:

  • On August 15, 2025, the SEC announced an enforcement action against a middle-market private equity firm for improperly calculating and applying management fee offsets to its funds (1).
  • The SEC alleged violations of Section 206(2) of the Investment Advisers Act. The firm agreed to pay $683,877 in disgorgement, interest, and penalties.
  • This matter is notable for two key reasons:
    • It challenges the perception that the current regulatory environment would reduce the number of complex private fund enforcement cases.
    • It reflects a more assertive enforcement posture, as the SEC pursued the matter under an anti-fraud statute and alleged a breach of fiduciary duty—an approach more aggressive than in comparable prior cases.

Relevant Conduct:

  • The case centered on the misallocation and miscalculation of management fee offsets related to transaction fees.
  • Misallocation of Transaction Fee Interest:
    • The firm deferred payment and collection of transaction fees, which were otherwise subject to a 100% offset against the adviser’s management fees.
    • It collected an 8% cash interest on the deferred transaction fees but did not apply this interest amount toward management fee offsets.
    • Because the funds’ limited partnership agreement (LPA) was silent on whether transaction fee interest should be applied to offsets, the SEC alleged the adviser collected undisclosed compensation by omitting such offsets.
  • Miscalculation of Offsets:
    • The LPAs stipulated that the full transaction fee would be offset against management fees, with reductions allowed for the proportional ownership of co-investors and other funds.
    • In at least one instance, the firm miscalculated this reduction, effectively applying the co-investor and other-fund ownership adjustments twice—thereby under-offsetting the management fees.

Takeaways:

  • SEC Expertise Remains Strong: Despite recent staff departures, this case underscores that the SEC retains substantial expertise in private fund matters. Pursuing this action required deep knowledge of LPA provisions, fee structures, and forensic accounting. The Asset Management Unit and Private Funds Unit continue to demonstrate the capacity—and Commission backing—to examine and investigate highly complex matters.
  • Dispelling Misconceptions About Enforcement Focus: Some market participants assumed the current administration would avoid intricate cases involving only institutional investors. This action should dispel that belief. The SEC took an unexpectedly aggressive approach and applied a strict reading of LPA language —a tactic many considered unlikely.
  • Compliance and Fee Governance: This case originated from a nuanced issue in fee offset application. Many firms’, compliance teams lack the technical expertise to fully review fee calculations and may rely on finance staff who do not have compliance backgrounds. The matter illustrates the risks of such an approach and the importance of cross-functional oversight and rigorous compliance testing.
  • Value of Compliance Testing: Real-time monitoring of fees, expenses, and compensation is challenging. Proactive compliance testing—particularly forensic reviews—is essential to identify and remediate issues before they escalate into regulatory matters.
  • Growing Focus on Fee Nuances in Private Equity: While this case involved a specific issue—management fee offsets—it highlights broader risks in the complex fee and expense structures of private equity funds. As the industry continues to democratize, the SEC’s attention to these nuanced areas is likely to intensify.

(1) In the Matter of TZP Management Associates, LLC