By Janaya Moscony
SEC³ President
August 28, 2025 | SEC³ Compliance

On August 15, 2025, the SEC charged a New York based private equity adviser with breaching its fiduciary duties under Section 206(2) of the Investment Advisers Act of 1940. The case centered on failures to properly disclose fee practices and to apply management fee offsets as required. The adviser agreed to resolve the matter, paying over $683,000 in disgorgement, penalties, and interest.

What the SEC Found

• Interest on Deferred Fees: The adviser permitted portfolio companies to defer transaction fees and collected interest during the deferral period. While the principal transaction fees were offset against management fees once paid, the interest income was not, which left investors without the benefit of that offset. The SEC treated this as an undisclosed conflict of interest, resulting in roughly $423,000 in additional fees.
• Improper Allocation: In at least one case, transaction fees were not divided among funds according to the methodology in the governing agreements. This inconsistent treatment resulted in about $79,000 in excess management fees.

Compliance Takeaways

• Fee Monitoring: This action demonstrates the SEC’s focus on the details of fee and expense practices, particularly offsets and allocations. Even technical errors or omissions can be viewed as fiduciary breaches.
• Conflict Disclosures: Advisers must ensure that potential conflicts — such as discretion to defer fees or benefit from interest — are fully disclosed in a way investors can understand.
• Testing Against LPAs: Compliance programs should include regular reviews of fee calculations against LPA provisions to confirm consistency and avoid misapplications.
• Documentation: Robust documentation of fee calculations, offsets, and conflict disclosures is essential to withstand SEC scrutiny.

At SEC3, we help advisers strengthen compliance programs by, among other things:

• Reviewing fee and expense practices for alignment with governing agreements.
• Testing disclosures to ensure they match actual practices.
• Supporting firms in building compliance processes that anticipate SEC exam priorities.