Private Fund Fee and Expense Enforcement Priority

The SEC’s private fund fee and expense enforcement priority means you must be able to prove, on demand, that every fee and expense charged to each private fund matches governing documents and disclosures, is allocated as described, and is supported by clear workpapers and approvals. Examiners have repeatedly focused on fee calculations, allocation practices, and disclosure adequacy under Advisers Act fiduciary duty principles. ¹

Key takeaways:

• Build a repeatable fee/expense “quote-to-cash” control: disclose → calculate → review → post → reconcile.
• Treat conflicts as fee events: affiliated service providers, offsets, and financing-related impacts need specific support and disclosure. ¹
• Keep exam-ready evidence: calculation worksheets, allocation memos, approvals, and investor reporting tie-outs.

This requirement is not a single rule with a checklist citation in the CFR. It is an SEC Division of Examinations priority area: private fund advisers should expect exam scrutiny on how they calculate management fees, allocate expenses across funds and accounts, apply fee offsets, and describe all of that to investors in a way that is complete and not misleading. ¹

Operationally, you should treat this as a “show-me” requirement. The examiner’s question is simple: “Walk me from the LPA/PPM and side letters to the number that hit the capital account (or invoice), and prove that it was correct.” If you cannot produce (1) the controlling disclosure, (2) the calculation logic, (3) the supporting data, and (4) the review and approval trail, you are exposed under the anti-fraud and fiduciary duty principles in Investment Advisers Act Section 206. ²

This page gives requirement-level implementation guidance for a CCO or GRC lead to operationalize the private fund fee and expense enforcement priority requirement quickly: scope, controls, evidence, exam questions, and a pragmatic execution plan you can run with your fund admin, finance, and deal teams.

What the “private fund fee and expense enforcement priority requirement” means in plain English

You need controls that prevent (and detect) two failure modes:

1. Math and mechanics failures: the adviser charged the wrong amount because inputs, formulas, fee rates, step-downs, post-commitment terms, or offsets were applied incorrectly. Examiners have stated focus on fee and expense calculation and allocation. ¹
2. Disclosure and conflict failures: the adviser charged an amount that may be permitted somewhere in the documents, but the disclosure was incomplete, unclear, or inconsistent with how the fee/expense was actually handled in practice, including conflicts such as affiliated service providers and financing-related impacts. ¹

You do not “comply” with an exam priority by writing a policy alone. You comply by being able to reconstruct, for any period and any fund, exactly what happened and why it matched the disclosed methodology, consistent with fiduciary duty expectations under Advisers Act Section 206. ²

Who it applies to (entity and operational context)

In scope

• SEC-registered investment advisers (RIAs) to private funds, including advisers to PE, VC, credit, real estate, infrastructure, and hybrid strategies, where investors bear management fees and/or fund expenses. ¹

Functions you must pull in

• Finance / fund accounting (fee runs, expense coding, GL posting, NAV reporting)
• Operations / investor relations (capital account statements, investor reporting, side letter tracking)
• Legal / compliance (LPA/PPM/IMA interpretation, disclosure controls, conflicts management)
• Deal teams (portfolio company fee streams, monitoring/transaction fees that may create offsets)
• Third parties (fund administrator, auditors, affiliated service providers)

High-scrutiny scenarios called out in exam focus areas

• Post-commitment period management fee mechanics (e.g., step-downs, invested capital definitions) ¹
• Fee offsetting (monitoring/transaction fees, other credits) ¹
• Affiliated service providers and related conflicts and pricing support ¹
• Fund-level lines of credit and related conflicts/disclosures ¹
• Adviser-led secondaries where allocations and conflicts are often examined as part of the broader conflicts focus ¹

Regulatory text

The SEC frames this as an examination priority rather than a standalone rule text. The provided excerpt placeholder indicates you must insert the exact quote from the SEC’s Division of Examinations 2025 Examination Priorities discussing private fund fees/expenses, including calculation/allocation and disclosure adequacy. ¹

Operator interpretation: because the SEC has publicly stated it will prioritize this area in exams, you should:

• Identify all fee and expense types your funds can charge.
• Map each type to the governing disclosure (LPA/PPM/side letters/advisory agreements).
• Prove your calculations and allocations through documented procedures, reviews, and reconciliations.
• Demonstrate conflict management where affiliates, offsets, or financing arrangements affect investor economics. ¹

The legal backbone is the adviser’s fiduciary duty and anti-fraud principles under Investment Advisers Act Section 206, which the SEC uses in fee and expense cases where practices are misleading, inadequately disclosed, or inconsistent with investor expectations created by disclosures. ²

Public enforcement cases

The provided dataset includes public enforcement references but not fully verified public identifiers/links (placeholders remain). You should treat these as signals of case patterns, and you should independently confirm the orders and citations before using them in board materials or training.

• [Firm name TBD] — SEC order referenced with placeholder citation [⚠️ VERIFY: Find IA order number] and date 2023-06-20, outcome includes a $350,000 penalty in the dataset. ³
• [Firm name – New York-based investment adviser] — SEC order referenced with placeholder citation [⚠️ VERIFY: Find IA order number], outcome includes a $1,500,000 penalty in the dataset. ³

What to take from the enforcement context: fee/expense issues commonly pair (a) a process gap (wrong calculation, wrong allocation, wrong offset) with (b) a disclosure gap (investors were not clearly told what would happen, or the disclosure did not match actual practice). That combination is how routine operational errors become Section 206 problems. ²

What you actually need to do (step-by-step)

Step 1: Build a fee & expense inventory (by fund, by vehicle)

Create a register that lists, for each fund/vehicle:

• Management fee types (commitment-based, invested capital-based, NAV-based, step-downs)
• Performance fee/carry mechanics (where applicable to allocations/expenses)
• Pass-through expenses (organizational, broken-deal, travel, consulting, valuation, compliance, admin)
• Financing-related items (credit facility impacts, if borne by the fund) ¹
• Offsets/credits (portfolio company fees and other offsets) ¹
• Affiliate-paid/affiliate-charged items (affiliated service provider arrangements) ¹

Output: “Fee & Expense Universe” spreadsheet with unique IDs for each charge type.

Step 2: Map each item to controlling disclosure and decision rules

For each line item in the inventory, document:

• Source document hierarchy (LPA/PPM/IMA, side letters, advisory committee consents, board minutes)
• Allocation rule (pro rata by commitments? by invested capital? by NAV? by deal participation? by share class?)
• Timing rule (accrual vs cash, period boundaries, true-ups)
• Approval rule (who signs off; when Legal/Compliance must review)
• Disclosure adequacy check: confirm the disclosure describes the actual practice in plain language, including conflicts. ¹

Output: “Disclosure-to-Calculation Map” memo per fund with an appendix table.

Step 3: Standardize the fee calculation package (the exam binder you want)

For each fee period (typically quarterly), create a repeatable package:

• Inputs (capital balances, commitments, invested capital, NAV, fee rates, step-down triggers)
• Calculation worksheet (with locked formulas and version control)
• Side letter deviations and how applied
• Offsets applied and support for the offset amounts ¹
• Reviewer checklist and sign-off
• Posting evidence (GL entries, capital account statements, invoices)

Control to implement: quarterly reconciliation of management fees charged vs disclosed calculation methodology (recommended best practice in the provided data).

Step 4: Implement allocation governance for expenses (especially “gray” expenses)

Set a rule: no expense allocation without an allocation memo for any of these categories:

• Broken-deal and diligence costs
• Operating partner / consultant costs
• Travel and entertainment tied to multiple vehicles
• Regulatory/compliance costs that might be adviser vs fund
• Expenses involving affiliates or related parties ¹

Allocation memo should state:

• Expense description and business rationale
• Funds/accounts benefiting
• Allocation basis and why it matches governing documents
• Conflict statement (if any affiliate involved) and mitigation steps ¹

Step 5: Conflicts and affiliate pricing file

Where the fund uses an affiliated service provider:

• Keep the service agreement, fee schedule, and scope
• Document the conflict disclosure that covers it
• Maintain a pricing reasonableness file (benchmarking, competitive quotes, or other internal support)

Control to implement: annual review of affiliated service provider fees for market competitiveness (recommended best practice in the provided data).

Step 6: Investor reporting tie-out and exception management

Run a tie-out that links:

• Fee/expense postings → GL → investor statements → audited financials (as applicable) Track exceptions:
• Formula/input errors
• Timing differences and true-ups
• Side letter misapplication
• Offset shortfalls/over-application ¹

Document remediation with:

• Correction entry
• Investor communication decision
• Root cause and control update

Required evidence and artifacts to retain (exam-ready)

Maintain these in a central repository by fund and period:

• Current LPAs, PPMs, IMAs, subscription docs, side letter matrix
• Fee calculation workpapers and source data extracts
• Expense allocation memos and approvals
• Offset support (portfolio company fee schedules, invoices, credit calculations) ¹
• Affiliated service provider contracts and pricing support ¹
• Credit facility terms and any fee/expense implications and disclosures ¹
• Policies and procedures covering fee/expense processes and reviews
• Exception log and remediation evidence

Tip: store artifacts as an “exam binder” structure so you can answer document requests like “management fee calculation worksheets and supporting documentation” quickly. ¹

Common exam/audit questions and hangups (what they ask, where firms stumble)

Examiner ask	Where teams get stuck	What “good” looks like
“Show the management fee calc for Qx and tie to governing docs.”	Side letters not integrated; formulas undocumented	Disclosure-to-calculation map + worksheet + reviewer sign-off
“How do you allocate broken-deal expenses across vehicles?”	No written allocation rationale	Allocation memo with rule, support, approvals
“Explain your fee offsets and how you ensure they’re applied correctly.”	Offsets tracked outside fund accounting	Offsets schedule + source docs + reconciliation to postings 1
“Do you use any affiliates? How do you set pricing and disclose conflicts?”	No benchmarking; disclosures scattered	Contract + conflict disclosure mapping + annual pricing review 1
“How do you oversee your fund administrator’s fee work?”	Over-reliance on third party	Documented review checklist; evidence of adviser review

Frequent implementation mistakes (and how to avoid them)

1. Treating the fund administrator as the control owner. The admin is a third party; the adviser still owns the fiduciary risk under Section 206. Keep review evidence in-house. ²
2. No single source of truth for side letters. Build a side letter matrix that feeds the fee run; require Compliance sign-off before applying changes.
3. Offsets tracked informally. Put offsets into the same close calendar as fees, with reconciliations and variance thresholds. ¹
4. Affiliates handled as procurement, not conflicts. Every affiliate arrangement needs disclosure mapping plus pricing support. ¹
5. Expense allocation decisions made in email only. Convert recurring patterns into written allocation rules and short memos for exceptions.

Enforcement context and risk implications

This priority area ties directly to Advisers Act Section 206 exposure because fee and expense practices are easy to frame as misleading if disclosures are incomplete or if actual operations drift from disclosed mechanics. ² The dataset shows observed penalties in recent public matters ranging from $350,000 to $1,500,000 in the sample provided. ³

Practical risk outcomes you should plan for:

• Restatements/true-ups and investor remediation
• Disclosure updates and LPAC communications
• Enforcement referrals if exam teams see repeatable patterns across funds

Practical 30/60/90-day execution plan

First 30 days: Stabilize and inventory

• Assign owners: Finance (calculations), Compliance (disclosures/conflicts), Ops (reporting), Legal (doc interpretation).
• Build the fee/expense inventory for each active fund.
• Collect governing docs and create a side letter matrix.
• Pick one recent quarter and assemble a “gold standard” fee package as the template. ¹

Days 31–60: Control build-out and evidence design

• Write the disclosure-to-calculation map for each fund.
• Implement the quarterly fee reconciliation control and reviewer checklist (management fees + offsets). ¹
• Stand up an expense allocation memo requirement for identified gray expenses.
• Start the affiliated service provider file (contracts, disclosures, pricing support). ¹

Days 61–90: Test, remediate, and make it exam-ready

• Perform a sample-based lookback across funds for fee runs and expenses; log exceptions and remediation.
• Run investor reporting tie-outs for at least one period: postings → statements.
• Train deal teams on what creates offsets and what expenses need memos.
• Build an exam response folder aligned to typical SEC document requests (fee workpapers, allocation policies, affiliate agreements, credit facility terms). ¹

Where Daydream fits naturally: use Daydream to maintain a living checklist of exam-request artifacts, assign control owners, and track evidence collection by fund and period so your exam binder stays current rather than rebuilt under deadline.

Frequently Asked Questions

Does this apply if we outsource fund accounting to a fund administrator?

Yes. The administrator is a third party; exam staff still expects the adviser to supervise fee/expense processes and retain evidence of review and approval. The exam focus is on calculation/allocation and disclosure adequacy. ¹

What’s the fastest way to get “exam-ready” for fees and expenses?

Build a single-quarter “gold standard” package: governing doc excerpts, side letter impacts, calculation worksheet, reviewer checklist, and posting tie-out. Then replicate it each period.

How should we handle post-commitment management fee step-downs?

Document the disclosed methodology and translate it into explicit inputs and triggers in the calculation workbook, with a reviewer checklist that confirms the step-down criteria were met. Examiners have explicitly called out post-commitment period management fees as a focus area. ¹

What evidence do we need for affiliated service provider arrangements?

Keep the agreement, the disclosure mapping that describes the conflict, and a pricing reasonableness file (benchmarking, quotes, or other support). The SEC has stated a conflicts focus that includes affiliated service providers. ¹

Are fee offsets always required?

Only if your governing documents or disclosures create an offset obligation. The operational requirement is to apply offsets exactly as disclosed and keep support that ties the offset to underlying amounts. ¹

What’s the most common reason fee/expense issues become enforcement matters?

A control breakdown plus a disclosure gap. Section 206 risk increases when actual fee/expense practices are inconsistent with what investors were told or when conflicts are not clearly disclosed. ²

Footnotes

1. 2025-exam-priorities

2. SEC Rules and Regulations

3. [⚠️ VERIFY: Find IA order number]