[co-authors: Marc Elovitz, Kelly Koscuiszka, John Nowak and Craig Warkol]
On August 15, 2025, the US Securities and Exchange Commission (SEC) charged a New York-based private equity adviser (the Firm) with breaching its fiduciary duties by failing to adequately disclose its practices regarding the receipt of interest on deferred transaction fees and the resulting conflicts of interest. The SEC alleged that the Firm duplicated transaction fee reductions when calculating certain fee offsets. The SEC also alleged that such conduct violated the Firm’s fiduciary duties and therefore violated Section 206(2) of the Investment Advisers Act of 1940. The SEC did not charge any violation of Rule 206(4)-8 or Rule 206(4)-7 or any individual.
Without admitting or denying the SEC’s findings, the Firm settled with the SEC, paying more than $683,000 in disgorgement, penalties, and prejudgment interest.
In Depth
Overview
The SEC charged the Firm with breaching its fiduciary duties in two ways:
- The Firm failed to disclose receipt of interest payments from five portfolio companies in connection with deferred transaction fees and failed to include such interest payments in a management fee offset calculation.
- The Firm failed to correctly allocate transaction fees among multiple funds that invested in the same portfolio company.
Interest on deferred fees
The SEC found that the Firm entered into management services agreements with certain portfolio companies that allowed the Firm to defer transaction fee payments either at the Firm’s discretion or if a related loan agreement required deferral. The SEC noted that, on several occasions, the Firm deferred transaction fees to allow a portfolio company to increase cash flows. If transaction fees were deferred, the Firm earned interest on the deferred payment pursuant to agreements between the limited partnership and the portfolio company.
The SEC alleged that the Firm breached its fiduciary duty to its limited partners when (1) it failed to disclose that it collected interest on deferred transaction fees and the related conflicts of interest, and (2) the Firm applied an offset to the management fees for the deferred transaction fee payments without offsetting the interest it received.
With respect to its conflicts of interest allegations, the SEC noted that the relevant limited partnership agreements (LPAs) allowed the Firm to collect transaction fees but required it to offset 100% of those transaction fees against its management fees. Although management services agreements between the Firm and the funds’ portfolio companies allowed the Firm to defer transaction fees on a discretionary basis, the terms of those agreements were not disclosed to the funds’ limited partners (other than to certain co-investors). As a result, the Firm did not disclose the conflict of interest that arose because the Firm could choose to defer payments and receive interest that would not offset management fees. During the period that the transaction fees were deferred, there was no corresponding management fee offset, and, as a result, the Firm received approximately $423,000 in management fees that were not reduced by the interest on the deferred fees. Such an arrangement, noted the SEC, effectively resulted in “interest-free loans” from the funds to the Firm.
Allocation conduct
With respect to at least one portfolio company, the SEC found that the Firm improperly allocated transaction fees among multiple funds that invested in the same portfolio company. The SEC concluded that the Firm failed to follow the calculation methodology set forth in the relevant LPAs and applied the allocation inconsistently, amounting to improper double counting, and improperly lowering each fund’s fee offset. Additionally, according to the SEC, the Firm only allocated a portion of the transaction fees. As a result of this conduct, the Firm allegedly received approximately $79,000 in excessive management fees.
Key takeaways for private equity sponsors
These charges demonstrate the SEC’s continued focus on fees and expenses charged by advisers. A perennial topic of examination and enforcement interest, undisclosed compensation, and inaccurate fee and expense calculations were highlighted in the SEC’s Fiscal Year 2025 Examination Priorities. This action calls attention to the SEC’s increasingly nuanced scrutiny of fee calculations. Even though the transaction fees were authorized and the fee deferral was in the discretion of the Firm, the SEC faulted the Firm for excluding the interest earned on the deferred fees from the fee offset, as well as for failing to follow the precise allocation mechanics.
It is noteworthy that the charges here were brought under Section 206(2) without the additional charges under Section 206(4), Rule 206(4)-7 (compliance policies and procedures), and Rule 206(4)-8 (statements to limited pooled investment vehicle investors) that have been charged in some of the prior cases involving private fund fees and expenses, potentially suggesting a more targeted enforcement approach. The penalty of $175,000 was relatively modest compared to prior actions involving negligence-based conduct related to fee calculations, even when the adviser did not voluntarily reimburse the allegedly excessive fees.
In light of this action, advisers are reminded to compare the fee provisions in LPAs to fees actually received by the funds, including the role of offsets and exclusions. Advisers should consider the conflicts of interest raised by fee calculations that allow discretion and evaluate the fee disclosure and conflicts language (even in circumstances where the conflict may seem obvious to limited partners).
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