Fees and expenses have bedeviled private fund advisers more than any other compliance problem, an analysis of SEC enforcement data by affiliate title Regulatory Compliance Watch finds.

Since 2012, regulators have filed at least 167 civil suits or settlement notices against private funds, their principals, or both, Commission records show. More than one out of every five of them – 37 cases – stemmed from firms’ fees, expenses or valuations. That’s more than twice as many as the next biggest enforcement category –disclosures, involving 17 cases, Commission records show.

Rounding out the top private fund enforcement causes of action were custody rule and pay-to-play violations (tied at 15 each), followed by a three-way tie among insider trading or information, conflicts of interests, or registration cases (14 each). Most of the pay-to-play, registration and custody cases came out of exam sweeps.

Examiners have swept the industry twice for pay-to-play violations: One set of cases were announced in 2017, the other earlier this year. The Commission announced 13 registration cases on the same day in 2018. All the cases were against advisers who failed to fill out their Form PFs.

Record pace


The $21 trillion private fund industry finds itself hurtled into a mainspring moment. SEC Chairman Gary Gensler has offered an ambitious reform agenda. Some wonder if Gensler is moving too quickly.

What’s undeniable is that his Commission is cracking down hard on the PF industry. Nearly a quarter of private fund cases (41) since 2012 have been filed since Gensler took his oath, in mid-April 2021, records show. Gensler’s SEC also accounts for two of the four private fund exam sweeps—the custody cases announced in September and four pay-to-play cases — targeting PFs or their executives.

One of Gensler’s first speeches as chairman was at the Institutional Limited Partners Association in November 2021. He said he worried then that “hundreds of billions of dollars in fees and expenses are standing between investors and businesses.” So it’s worth noting that of the three-dozen-plus cases the Commission has brought involving fees or expenses, only eight have so far come under Gensler’s tenure.

Adam Aderton helped run the Commission’s Asset Management Division until he left to become a partner at Willkie, Farr & Gallagher last year. He says that whatever you think about the function of the SEC’s private fund enforcement cases, the form has been visible for a long time.

“SEC enforcement results involving private funds are consistent with what SEC examinations and enforcement staff repeatedly have said are top priorities.”

The SEC has said that it perceives private funds as opaque, and I think the SEC sees enforcement actions addressing private fund fee, expense, valuation, and conflict issues as part of its overall effort to make those funds more transparent. Private fund advisers should anticipate continued heightened scrutiny of these issues.”