Private Fund Fee and Expense Oversight

Private fund fee and expense oversight requires you to prove, with records, that every fee billed and every expense allocated matches disclosed fund terms, is calculated correctly (including offsets and side letters), and is reviewed by someone independent of the preparer before investors are charged. Operationalize it with repeatable calculations, a portfolio-fee register, a written allocation policy, and periodic testing.

Key takeaways:

• Build controls around three failure points: management fee calculations, portfolio company fees/offsets, and expense allocations.
• Tie every calculation to governing documents (LPA/PPM/IM, side letters) and retain workpapers that show the math and approvals.
• Treat this as fiduciary-duty hygiene; SEC enforcement continues even after the Private Fund Rules were vacated ¹.

The private fund fee and expense oversight requirement is less about writing another policy and more about running a billing and allocation process that can survive an exam. Examiners expect you to show: (1) what the fund documents and side letters allow, (2) what you actually charged or allocated, (3) how you calculated it, and (4) who reviewed it before it hit investor capital accounts.

This is an SEC fiduciary-duty issue in practice: if the adviser benefits from an error, the SEC treats weak controls, poor documentation, and disclosure gaps as high-risk indicators. Recent enforcement demonstrates the SEC will pursue fee calculation failures and related supervisory breakdowns, even when the problem is process design rather than outright fraud ². Separately, even though the SEC’s prescriptive Private Fund Rules adopted in August 2023 were vacated in June 2024, the enforcement posture around core duties for fees, expenses, and conflicts continues ¹.

Use this page as a build sheet: define scope, map terms to calculations, implement reviews, and assemble an evidence set you can hand to exam staff without scrambling.

Requirement: private fund fee and expense oversight requirement (plain-English)

You must run a controlled process that prevents (or quickly detects and corrects) investor overcharges and improper allocations. That means:

• Fees (management fees, performance allocations where applicable, and any offsets) are calculated exactly as disclosed in fund documents and side letters.
• Expenses charged to the fund are consistent with disclosures, allocated using a reasonable, repeatable method, and approved under defined authority.
• Portfolio company fees and other economic benefits are tracked centrally, disclosed as required, and applied to offsets where fund documents require offsets.

Who this applies to (entity and operational context)

This applies to firms acting as private fund advisers, including:

• SEC-registered investment advisers and exempt reporting advisers with private funds (operationally, the same controls are expected if you are examined).
• Advisers using a third-party administrator or internal fund accounting team. Even if calculation work is outsourced, you still own oversight.

It is most operationally relevant where you:

• Bill management fees from committed capital, invested capital, NAV, or “gross assets” with step-downs and recycling provisions.
• Have side letter fee breaks, MFN elections, or bespoke offsets.
• Receive portfolio company fees (transaction, monitoring, director fees, consulting fees) through the adviser or affiliates.

Regulatory text

Provided excerpt: “Private Fund Fee and Expense Oversight.”

Operator interpretation: You are expected to supervise and validate fee and expense practices so they align with disclosures and fiduciary obligations, supported by documentation you can produce in an exam. The SEC has brought actions where advisers’ fee calculations deviated from offering terms and the adviser lacked adequate controls to prevent or catch errors ². The vacatur of the Private Fund Rules does not remove the SEC’s focus on fiduciary-duty enforcement around fees and expenses ¹.

Public enforcement cases

In the Matter of TZP Management Associates LLC

• What it shows: The SEC focused on management fee calculation failures and treated them as a fiduciary-duty breach tied to inadequate process and supervision ².
• Why it matters for operators: Examiners will ask for your calculation support, approvals, and reconciliation to governing documents. “Spreadsheet + tribal knowledge” is a predictable failure mode.
• Monetary sanctions: The order reflects total monetary sanctions of $683,877 ².

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

Step 1: Lock your “fee and expense source of truth”

1. Inventory governing terms per fund: LPA/PPM/IM sections governing management fee base, rate, step-down dates, valuation mechanics, fee holidays/waivers, and offsets.
2. Inventory side letters and build a side-letter matrix that explicitly states the operational impact (rate reduction, special fee base, different timing, bespoke expense caps, etc.).
3. Define authoritative data sources: committed capital, called capital, NAV, invested capital schedules, valuation marks, fee-bearing asset schedules, and FX rates (if applicable).

Deliverable: A fund-by-fund “Fee & Expense Terms Matrix” signed off by Legal/Finance/Compliance.

Step 2: Implement independent validation of management fee calculations (before invoicing)

Use a dual-review workflow:

1. Preparer completes calculation using a standardized template that cites the governing provision (for example, “Management fee base per LPA section X”).
2. Independent reviewer (not the preparer) checks:
   • Correct period and proration
   • Correct rate and step-down date
   • Correct fee base definition and exclusions
   • Side letter application at the investor level
   • Offsets applied as required
3. Approver signs off before the invoice or capital account posting is released.

Control goal: Catch errors that favor the adviser before investors are charged. Enforcement shows the SEC expects accurate calculations and sufficient controls ².

Step 3: Build and maintain a portfolio company fee and benefit register

Create a centralized register capturing all economic benefits received from portfolio relationships, whether received by the adviser, an affiliate, or related persons. Track:

• Transaction fees, monitoring/consulting fees, director fees
• Expense reimbursements from portfolio companies
• Non-cash benefits when relevant to disclosure (document your approach)

Operational requirements:

1. Deal team notification trigger: A required compliance/finance notification when any portfolio fee arrangement is negotiated or amended.
2. Quarterly reconciliation: Reconcile register totals to GL/bank statements and portfolio company agreements.
3. Offset engine: Where fund terms require offsets, calculate and apply offsets to management fees with clear workpapers.

Deliverable: Portfolio Fee Register + quarterly reconciliation memo.

Step 4: Adopt a written expense allocation policy that matches disclosures

Your policy should answer, in plain terms:

• Which expenses are fund-borne vs adviser-borne
• Allocation bases (causation, AUM, headcount, time spent)
• Treatment of broken-deal costs, travel, operating partner costs, and third-party consultants
• Approval thresholds and exceptions process

Operational requirements:

1. Pre-approval for gray areas: Require Compliance/Finance approval before charging categories that are frequently challenged (compensation allocations, overhead, technology, travel that mixes fundraising and investment work).
2. Consistency checks: Compare actual allocations to policy each period; document any deviation and why it is allowed under disclosures.
3. Disclosure alignment: Confirm offering documents describe the expense categories and allocation approach you actually follow.

Deliverable: Expense Allocation Policy + periodic allocation testing.

Step 5: Test the program annually (internal audit or external)

Run a targeted annual review that samples:

• Management fee calculations across multiple periods and investor types
• Side letter fee break application
• Portfolio fee completeness and offsets
• Expense allocation support, approvals, and consistency with disclosures

Deliverable: Annual Fee & Expense Oversight Report with findings, remediation owners, and completion dates.

Required evidence and artifacts to retain

Keep artifacts in an exam-ready folder per fund and per period:

Fee calculations

• Final calculation workbook/system output
• Source data extracts (capital balances, NAV, invested capital schedules)
• Side letter impact worksheet
• Reviewer checklist and sign-off
• Investor invoices/capital account statements sent

Portfolio fees

• Portfolio fee register
• Underlying agreements (monitoring/transaction/director arrangements)
• GL/bank support and reconciliation
• Offset calculations and evidence of application in fee billing
• Investor reporting disclosures related to portfolio fees (as applicable)

Expenses

• Expense allocation policy and any approvals/updates
• Allocation workpapers for sampled periods
• Time tracking or allocation basis support (where used)
• Exception approvals and rationale
• LPAC/board materials if you present allocations (if applicable)

Common exam/audit questions and hangups

• “Show me how you ensure fees match the LPA/PPM and side letters.” Expect a request for your workflow and a sample testing set.
• “Who reviews the fee calculations, and what do they check?” Examiners look for independence and evidence of review, not verbal assurances.
• “How do you identify all portfolio company fees, including those paid to affiliates?” Central tracking is the usual gap.
• “Explain your expense allocation basis for compensation/overhead.” Ad hoc allocations without written methodology draw scrutiny.
• “How do you correct errors, reimburse, and disclose?” You need a documented error remediation and investor communication path.

Frequent implementation mistakes (and how to avoid them)

Mistake	Why it fails in an exam	How to avoid it
Spreadsheet billing with no independent review	Overcharges persist and you cannot prove supervision	Require dual review and pre-invoice approval with a checklist
Side letters stored but not operationalized	Fee breaks or special terms get missed	Maintain a side letter matrix tied to billing inputs
Portfolio fees negotiated by deal teams with no compliance visibility	Offsets/disclosures get missed	Put a notification trigger in the deal process; reconcile quarterly
Expense allocation policy exists but doesn’t match practice	“Policy on paper” defense fails	Test actuals vs policy and disclosures each period
Weak remediation documentation	Corrections look discretionary	Use a standard error log, reimbursement memo, and investor notice template

Enforcement context and risk implications

The SEC continues to bring cases around fee calculation failures as fiduciary-duty breaches, with meaningful sanctions and remedial undertakings ². Separately, the vacatur of the Private Fund Rules does not eliminate the expectation that advisers manage conflicts and bill consistent with disclosures under core fiduciary principles ¹. Treat this requirement as a standing exam priority: your control design and evidence quality matter as much as whether an error occurred.

Practical 30/60/90-day execution plan

First 30 days: stabilize and map

• Assign an owner for each stream: fee billing, portfolio fee tracking, expense allocation.
• Build the Fee & Expense Terms Matrix and side letter matrix for each active fund.
• Document the current state workflow and identify where independence is missing.
• Stand up a basic portfolio fee register and start capturing new items immediately.

Days 31–60: implement controls and templates

• Deploy a standardized fee calculation workbook/system checklist with citations to fund terms.
• Implement dual review and sign-off before invoices go out.
• Draft or revise the expense allocation policy; align it to disclosures and actual practice.
• Add quarterly reconciliation steps for portfolio fees and offsets.

Days 61–90: test and harden for exams

• Perform a mini-audit: sample periods and reperform calculations.
• Fix gaps (missing offsets, side letter misapplications, unsupported expense allocations).
• Create an exam-ready evidence index per fund (what, where stored, retention owner).
• If you need scale, evaluate using Daydream to centralize obligation tracking, evidence mapping, and reviewer attestations across funds and reporting cycles.

Frequently Asked Questions

Do we still need this program if we use a third-party fund administrator?

Yes. The administrator can perform calculations, but you still need documented oversight, including review of outputs against fund terms and side letters, plus evidence of your approvals.

How do we show “independent review” in a small firm?

Separate preparer and reviewer roles where possible (CFO prepares, CCO reviews, or vice versa) and use a checklist with sign-off. If true separation is hard, add periodic independent testing by internal audit or an external reviewer.

What counts as a “portfolio company fee” for the register?

Track fees and economic benefits tied to portfolio relationships, including transaction and monitoring/consulting fees and director compensation arrangements, whether received by the adviser or affiliates. Tie the register fields to disclosure and offset mechanics.

How often should we reconcile the portfolio fee register to the general ledger?

Quarterly is a practical cadence that aligns to investor reporting and fee periods. Reconcile more frequently if deal activity is high or fee arrangements are complex.

If we find an overcharge, what documentation should we create?

Prepare an error memo that explains root cause, investor impact, reimbursement method, timing, and control changes to prevent recurrence. Retain proof of repayment and any investor communications.

Does the Private Fund Rules vacatur mean reduced expectations on fees and expenses?

No. The SEC continues to frame fee/expense issues under fiduciary duty and conflict principles even after the vacatur ¹.

Related compliance topics

• 2025 SEC Marketing Rule Examination Focus Areas
• Arizona Investment Adviser Advertising Rules and Disclosure Requirements
• Best Execution: 2025 Standards (SEC Trend)
• Best Execution: Fiduciary Duty (SEC 206)
• Best Execution: Trade Allocation (SEC 206)

Footnotes

1. insight_venture_enforcement, 2024

2. tzp_management_enforcement_2025, 2025