Private Equity: The Next Wave of SEC Enforcement Actions?

Securities and Derivative Litigation   |   July 8, 2014
Share Page

Ever since the Dodd-Frank Wall Street Reform and Consumer Protection Act required many investment advisers to private equity funds to register with the SEC for the first time, fund managers knew that additional scrutiny might eventually follow. The SEC then launched the Presence Exams Initiative in October 2012, specifically to examine the operations of private equity investment advisers. Now, the Commission seeks to greatly increase the size of the task force examining the private equity industry. As a result of these developments, much of the private equity industry is now subject to registration, a new compliance infrastructure, and soon, perhaps, the next round of SEC enforcement actions.

Currently, the SEC is most focused on fund manager practices related to disclosure of management fees, valuation of assets, and conflicts of interest. From the Commission’s perspective, the discretionary nature of certain undisclosed fund expenses and the potentially inflated valuation of illiquid assets held by private equity funds are of special concern.

Given the SEC’s mobilization and commitment of resources to the examination of private equity, the scrutiny of investment advisers of privately managed funds will inevitably increase. Recent comments by Andrew Bowden, Director of the Office of Compliance Inspections and Examinations for the SEC, indicated that more than half of the 150 investment fund manager examinations completed so far reveal what the SEC believes to be violations of law or material weaknesses in compliance controls regarding the collection of fees and allocation of expenses imposed by investment advisers against managed funds. Examples included shifting of staff costs onto portfolio companies or to third-party contractors, undisclosed fee arrangements with operating partners, fee-shifting, and the use of accelerated monitoring fees charged to portfolio companies. Enforcement actions have already begun. SEC claims against Clean Energy Capital, LLC and Camelot Acquisitions Secondary Opportunities Management, LLC, alleging misuse of managed investor funds, are likely early examples of the potentially many cases that will define the boundaries of acceptable investment adviser conduct.

Regardless of the extent and scope of the SEC’s own enforcement actions, the Dodd-Frank disclosure requirements and the SEC’s ongoing investigations may also invite private claims. Actions against the industry are still in their infancy, but now that private equity is less private, some managers may find themselves in the crosshairs of the next wave of regulatory enforcement and claims.

©2020 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.

Subscribe to Publications


The information on this website is presented as a service for our clients and Internet users and is not intended to be legal advice, nor should you consider it as such. Although we welcome your inquiries, please keep in mind that merely contacting us will not establish an attorney-client relationship between us. Consequently, you should not convey any confidential information to us until a formal attorney-client relationship has been established. Please remember that electronic correspondence on the internet is not secure and that you should not include sensitive or confidential information in messages. With that in mind, we look forward to hearing from you.