In an echo of the 2003 mutual fund scandals, in which large institutional investors were given preferential treatment at the expense of smaller investors, the SEC is taking a fresh look at private equity funds and their methods for distributing profits.
Bloomberg reported Friday that the SEC “is seeking to determine whether some private-equity firms are taking more profits from investments than they should under agreements with fund clients,” citing two people with knowledge of the matter.
Pursuant to provisions in the Dodd-Frank Act, the commission is examining how buyout funds ensure that payouts follow “the sequence set out in partnership documents.”
“Regulators are looking for deviations from the distribution process, or waterfall, which usually calls for clients to receive some gains on investments before the fund manager,” the news service reports.
The SEC is also looking into how buyout firms allocate expenses among investors, including those incurred for deals that are pursued but not completed.