SEC Private Fund Non-Scienter Disclosure Actions Continue Under Chairman Atkins

On August 15, 2025, the Securities and Exchange Commission (SEC) announced settled charges against an investment adviser to the private funds that it managed with breaching its fiduciary duty by overcharging management fees and related disclosure failures.¹ Specifically, the SEC charged TZP Management Associates, LLC ("TZP") with violations of Section 206(2) of the Investment Advisers Act of 1940 ("Advisers Act"). To settle the charges, TZP agreed to pay more than $680,000 in monetary relief and to conduct a distribution to harmed investors.

The SEC's action, based solely on a non-scienter claim, underscores the SEC's ongoing focus on management fee calculation practices and corresponding disclosures under Chairman Atkins. As alleged, TZP engaged in two fee offset practices that were inconsistent with the disclosures in the limited partnership agreements (LPAs) and, as such, inadequately disclosed. The first involved interest on deferred transaction fees. Many of TZP's management services agreements obligated the portfolio company to pay transaction fees. However, the fees could be deferred (either in TZP's sole discretion or when loan covenants prohibited payment), and TZP could charge interest on the deferred fees at an annual rate of eight percent. When the deferred fees and interest were paid, TZP offset only the principal amount against fund-level management fees, retaining the interest for itself, despite the LPAs not explicitly excluding interest from the fee offset provision. The absence of clear disclosure for the manager to retain the interest provided the bases to charge potential conflict of interests and disclosure failures for these practices.

The second offset practice and disclosure violations involved the improper allocation of transaction fees among affiliated funds. The LPAs specified that, when more than one TZP fund invested in the same portfolio company, each fund's management fee offset should be calculated based on all transaction fees received by TZP from that company, with a single reduction to reflect each fund's fully diluted equity ownership. However, TZP deviated from this approach. First, it allocated only a portion of the total transaction fees to each fund based on the amount of capital each fund had invested in the portfolio company. Then, TZP applied a second reduction to each fund's share based on its fully diluted ownership percentage. This in essence resulted in double counting the reductions, first by invested capital and then by ownership percentage. This was inconsistent with the LPA language and led to lower fee offsets for the funds and higher management fees retained by TZP. This practice was not disclosed to the funds or their limited partners and created an undisclosed conflict of interest.

This SEC action provides for several lessons to be learned regarding the SEC's Division of Enforcement under Chairman Atkins and its continuation of certain enforcement practices for this area of the industry. First, the Division of Enforcement is continuing to scrutinize financial conflicts of interest disclosures, including — and importantly — in the private fund space. In particular, the management fee practices and related disclosures in private fund LPAs need to track and align, or they will be subject to scrutiny, investigation, and action by the SEC. Finally, in this space, the Division of Enforcement appears ready and willing to continue to use Section 206(2) of the Advisers Act, and its lower non-scienter threshold to bring charges, as a key tool in its arsenal. Thus, this Division of Enforcement will not necessarily be limiting itself to only pursuing cases for which they can establish scienter-based violations.

Footnote

1 https://www.sec.gov/enforcement-litigation/administrative-proceedings/ia-6908-s.

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