The Securities and Exchange Commission has set its eyes on conducting a major crackdown on the private equity’s structure.
After SEC scrutinized major banks and hedge funds, the buyout industry thinks they are safe, but now SEC has set its eyes on them.
According to SEC Exam Program Head Drew Bowden, the agency found out that half of all the private equity firms they have examined in the past two years have illegal fees and severe compliance violations. They will intensify their scrutiny on this $3.5 trillion industry, said Bowden.
Just like hedge fund, PE funds are known to be lightly regulated ever since because investors in this industry are ultra rich people who can easily reward, need lesser protection, and can easily sustain losses.
Also, just like hedge funds, PE funds usually charge management fee at 1.5 to 2 percent of the assets while keeping the 15 to 20 percent of the profits earned.
Like hedge funds, PE funds saw a significant growth in their investment capitals, which comes from unsophisticated ultra rich people like pension funds and endowments that handle regular people’s money.
It was the 2012 Dodd-Frank legislation that provided a bigger leeway for SEC to regulate these PE firms. In 2012, SEC established a special unit that is assigned to delve deeper into the PE industry.
In a report from Bloomberg News in April 7, SEC found out that most PE funds were greatly increasing the fees they charge the companies they have invested in. PE firms have also charged investors fees that are supposed to be paid by the firms themselves.
But the biggest threats that face the private equity big shots are the carried interest tax rate battles that could increase the very low tax they pay if they lose.