The pressure on private equity and hedge fund firms to disclose more about what investors pay them continues to build from Washington regulators questioning long-held traditions.
While officials at the SEC are looking hard at fees and expenses charged to investors, the IRS is looking more at possible abuses by private equity general partners shifting income to more favorable tax treatment.
Securities and Exchange Commission officials are telling private equity and hedge fund managers to prepare for more enforcement cases involving undisclosed fees and misallocated expenses.
But a coalition of public pension fund trustees — not content to wait for a case-by-case approach — is pressing the SEC to require more fee disclosure.
In a July 22 letter to SEC Chairwoman Mary Jo White, 13 state and municipal treasurers and comptrollers representing $1 trillion in public pension fund assets called for an industry standard to give private equity limited partners more transparent and frequent information on fees and expenses.
The only fees investors see regularly, they said, are directly billed management fees, while three other charges — fund expenses, allocated incentive fees and portfolio-company charges — “are often reported deep in annual financial statements,” said the letter, signed by officials from the District of Columbia, New York City, California, New York, Virginia, Wyoming, North Carolina, South Carolina, Rhode Island, Vermont, Nebraska, Oregon and Missouri. Coalition members want more consistent and comparable fee disclosures and believe the SEC is in the best position to require those changes.
SEC officials declined to comment on the letter.
In May, Marc Wyatt, the current acting director of the Office of Compliance Inspections and Examinations who helped create its private funds unit, told a private equity gathering that investors — many of whom were surprised by some of the practices SEC examiners uncovered — are now more focused on fees and expenses, and general partner disclosure practices are changing.
“However, there is still room for improvement,” said Mr. Wyatt. “Many managers still seem to take the position that if investors have not yet discovered and objected to the expense allocation methodology, then it must be legitimate and consistent with their fiduciary duty.
“It is reasonable to assume that the next year may bring additional private equity actions” by the SEC enforcement division, said Mr. Wyatt.