by The Compliance Exchange on September 21, 2012
The U.S. Securities and Exchange Commission is seeking to determine whether some private-equity firms are taking more profits from investments than they should under agreements with fund clients, according to two people with knowledge of the matter.
The SEC, pursuing a review of the industry begun after passage of the Dodd-Frank Act in 2010, is examining how buyout funds ensure that payouts follow the sequence set out in partnership documents, said the people, who asked not to be identified because the matter isn’t public. 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 SEC stepped up its scrutiny of the private-equity business following the 2008 collapse of Lehman Brothers Holdings Inc., which accelerated a financial crisis that froze deal- making and forced firms to write down the value of their holdings. After Dodd-Frank authorized greater oversight of money managers, the agency initiated its broad review of practices at private-equity and hedge funds.
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