Fee Offsets, Disclosure, and Avoiding SEC Scrutiny
August 2025
Recent SEC enforcement activity highlights a key truth for private fund managers: errors in fee calculations aren’t just accounting mistakes; they can be violations of fiduciary duty, even without intent to deceive.
In a recent case, the SEC sanctioned a private equity sponsor for failing to properly credit management fee offsets related to compensation received from portfolio companies. The enforcement action centered on two practices:
Charging Interest on Deferred Fees Without Offset
The adviser entered into agreements with portfolio companies allowing certain fees (e.g., monitoring or advisory) to be deferred—sometimes at its own discretion. These agreements also permitted interest to accrue during the deferral period. But when those fees and interest were eventually paid, only the principal was applied as an offset against management fees owed by the fund, not the interest. This omission was not clearly disclosed to LPs, nor was the conflict of interest appropriately mitigated.
Improper Allocation of Transaction Fees Among Funds
In situations where multiple funds had invested in a single portfolio company, the adviser misallocated transaction fees by applying multiple layers — first based on invested capital, then again based on ownership percentages. This wasn’t consistent with fund documents and resulted in lower offsets and correspondingly higher fees charged to the funds.
Why This Matters—Even If You’re Confident in Your Fee Math
The real issue in this case wasn’t just math, it was the failure to follow the LPA and the lack of disclosure to investors. When it comes to fee offsets, silence or mistakes can look like self-dealing. Practices evolve over time, but governing documents often don’t keep up. And even minor variations in how transaction fees are booked, deferred, or shared among funds can result in large discrepancies over a fund’s life.
Moeller Law Can Help
Whether you're using fund docs prepared years ago or drafting a new suite from scratch, Moeller Law can:
Review existing LPAs, side letters, and internal practices,
Coordinate with tax, finance, compliance, and investment teams to ensure all stakeholders are aligned,
Recommend updates or supplements that address current realities,
And provide this support through flat-fee or fractional GC models that cost far less than what’s typical at larger firms.
Sophisticated investors will often ask to see previously granted side letter terms, fee offset practices, and advisory arrangements. Being consistent and defensible in your approach isn’t just a legal issue; it’s a trust issue!
Ready to take a closer look at how your fee arrangements and documents stack up?
