After receiving the proxy for greater oversight of money-managers by Dodd-Frank, there is rumbling that the SEC is stepping up its review of certain practices at private-equity funds.
In the cross hairs this time: conflicts of interest in general, and, in particular, the so-called “waterfall”, i.e. the distribution sequence among the manager and investors that is spelled out in the partnership agreement. The SEC is concerned that funds may not have put in place appropriate policies and procedures and internal controls to track the agreement.
Another area of concern is expense allocation among investors and funds. As Carlo V. di Florio, director of the SEC’s office of compliance inspections and examinations, stated at a conference in May: “A firm should clearly disclose to clients the fees that it is earning in connection with managing investments as well as expense allocations between a firm and its client fund.”
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