September 8, 2025
What happened?
On August 15, 2025, the SEC announced charges against a Registered Investment Adviser for its management fee calculation practices for private fund clients. Each fund has a limited partnership agreement (“LPA”) that states the adviser is entitled to management fees and may receive transaction fees, including advisory fees, monitoring fees, and other fees, from portfolio companies. The LPAs require the adviser to reduce or offset the management fees the funds owe by a portion of the transaction fees.
Two fee offset calculation practices created conflicts of interest that were not adequately disclosed to the funds or their limited partners. First, in five different portfolio company investments, the adviser collected interest on deferred transaction fees, and this interest was not included in the corresponding fee offsets. This practice resulted in the funds receiving lower fee offsets. The adviser failed to adequately disclose this arrangement and the conflict of interest. Second, the adviser used a reduced allocation of transaction fees for a portfolio company in which multiple funds invested. This also lowered the fee offsets that should have been credited to the funds and increased the management fee retained by the adviser.
These calculation practices resulted in over $500,000 in excess management fees. For these violations, the SEC ordered the adviser to pay over $1.2 million in civil penalties, disgorged management fees, and interest.
What does this mean for me?
Fees have always been a primary focus of the SEC. With Chairman Atkins describing a shift away from regulation by enforcement and toward investor protection, fees will stay in the spotlight. Your fee billing practices will be scrutinized in SEC examinations, and violations like the above will lead to enforcement actions.
Protecting your firm from similar mistakes takes ongoing effort. Begin by taking the necessary steps to match your billing procedures to your advisory agreements. Make sure that any conflicts of interest are disclosed and mitigated. Any mismatch in what the agreements say and what your calculations and billing practices actually do is a potential problem. Additional disclosure or a change in billing practices may be needed. Once you have matched your billing practices to the disclosed fee billing process, monitor your fee billing for any changes in behavior, and regularly test these calculations for accuracy.
