Statement: SEC Exams Show Private Fund Managers Overcharge Investors


June 23, 2020

Carter Dougherty
(202) 251-6700

SEC Exams Show Private Fund Managers Overcharge Investors

Today the SEC issued a Risk Alert warning investors and the public about concerns they identified while conducting examinations of private equity and hedge funds. The problems the SEC identified include fund managers’ failure to make full and fair disclosure of conflicts of interest, charging improper fees, and failure to implement policies to prevent staff from trading on material non-public information. In other words, the SEC’s examinations have shown that private equity and hedge fund managers are consistently engaged in self-dealing and overcharging investors, like pension funds that provide for the retirement security of millions of Americans.

This is the first major pronouncement from the SEC about the risks in private equity and hedge funds since the famous “Spreading Sunshine” speech that Drew Bowden, the former head of the SEC’s examination division, gave in 2014. At that time, Bowden stated, “When we have examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law or material weaknesses in controls over 50% of the time.”

It was a shocking revelation that should have resulted in major enforcement actions from the SEC and real behavioral change from the industry. Now, six years later, we see confirmation that the SEC did very  little to respond to that first round of revelations,  and that private equity and hedge funds are continuing  their abusive business as usual.

When private equity funds are faced with criticism about the impact of leveraged buyouts on businesses, workers and communities, they often rush to argue that they make a positive impact because s they  provide high returns  for pension funds. The reality is that their behavior is often directly damaging to their investors as well.

Ludovic Phalippou, Professor of Financial Economics at the University of Oxford business school has spent years studying private equity. In a recent interview, he observed that the industry’s activities “might be one of the largest [wealth transfers] the history of modern finance: from a few hundred million pension scheme members … to a few thousand people working in private equity.”

Last year, pension plans invested more than $300 billion in US buyout funds.  Spreading their reach, these funds have now secured permission from the Department of Labor to start collecting more investments from 401(k) investors.

Policymakers in Washington need to step in to stop private equity’s destructive behavior, which harms workers, communities and retirement savers. They should pass the Stop Wall Street Looting Act, which addresses core private equity abuses by requiring Wall Street billionaires who manage private equity funds to share in the successes and failures of their investments, ends unfair tax breaks,and protects workers when PE-owned companies go bankrupt. It also adds key investor protections including requiring real disclosure of financial information about portfolio companies, fees, costs, and returns – all of which are now subject to massive manipulation – and reasserts the fiduciary duties of care and loyalty to put the interests of investors ahead of those of the Wall Street fund managers, which are now often signed away or ignored.  The SEC also needs to step up, and not simply report after the fact that abuses and law breaking continue, but actually take action to stop them.