Navigating SEC Scrutiny: Valuation and Fee Transparency

Over recent years, the alternative investment industry has continued to evolve in response to dynamic market conditions and regulatory developments from the U.S. Securities and Exchange Commission (SEC). While the Private Fund Adviser Rule was not adopted in 2024, there remains a strong industry-wide emphasis on the transparency and accuracy of valuation practices and fee structures for how fund managers value illiquid assets and disclose fees to investors. This, in turn, has placed emphasis on the importance of accounting policies and financial statement disclosures, as well as risk assessments and audit procedures performed by auditors for the funds.

This article explores the fundamental reasons for this persistent regulatory focus, the practical impact on fund managers, and the ways these developments are reshaping investor transparency and audit practices.

Background: SEC’s Focus on Valuation and Fees

Valuation and fee disclosures have historically posed challenges in alternative investment funds — such as hedge funds, private equity, venture capital, and real estate funds — due to the complexity and subjectivity inherent in valuing non-traded assets and the opacity of fee structures. Following several high-profile enforcement actions and concerns about inconsistent reporting, the SEC has sought to protect investors by maintaining its oversight on these matters.

Although the Private Fund Adviser Rules were ultimately vacated and not implemented, the SEC is still focusing on these topics during their examinations of investment managers and the funds they manage. One example, from a recent SEC Administrative Proceeding from Aug. 15, 2025, resulted in a New York-based Registered Investment Adviser (RIA) being charged $683,000 in monetary relief to be distributed to investors for breaches of their fiduciary duty regarding management fee calculation practices for its private fund clients related to compensation the investment manager received from portfolio companies. The order found that the investment manager breached its fiduciary duty to the funds by failing to disclose amounts earned and by improperly recording fee offsets related to its receipt of transaction fees from portfolio companies, resulting in more than $500,000 in excess management fees being charged.

Impact on Fund Managers

Enhanced Documentation and Controls

In light of the SEC exam priorities and the example provided above, fund managers should continue to demonstrate robust processes and controls for both asset valuation and fee calculation. The SEC expects managers to:

• Maintain comprehensive documentation supporting key judgments in fair value measurements.
• Adequately disclose fee structures to investors, as well as ensure that the calculation of certain fees, such as management fees, is calculated correctly and in accordance with the limited partnership agreements.

Failure to implement appropriate policies and procedures can result in enforcement action, reputational damage, and investor withdrawal.

Increased Compliance Costs

Staying compliant requires significant investment in personnel, systems, and a solid understanding of fair valuation practices in accordance with Generally Accepted Accounting Principles (GAAP). As such, to remain compliant, fund managers have been bolstering their compliance teams and hiring third-party valuation specialists to ensure that valuations and disclosures comply with GAAP. Technology investments are also on the rise, with managers seeking automated solutions to track, calculate, and disclose fees and valuation inputs with precision. The cultural shift is towards greater transparency and accountability across the organization, from front-office deal teams to back-office finance and compliance staff.

Impacts on Audit Requirements and Procedures

Enhancing Relationships with Auditors

Given the SEC’s continued focus on investment advisers’ documentation supporting key judgments in fair value measurements and fee disclosures, it remains vital for investment advisers to foster and maintain communication between fund managers and their independent auditors. Auditors will test that adequate controls are in place and operating effectively for the authorization, execution, recording, and reporting of investment valuation and related-party fees.  Managers should expect and be prepared for detailed audit inquiries and requests for supporting evidence regarding these significant risk areas.

Focused Audit Attention on Fair Value

Specifically, auditors are placing continued emphasis on management’s valuation techniques for illiquid assets. Under U.S. GAAP (ASC 820), a few key procedures auditors perform, but are not limited to, include the following:

• Independently evaluate the appropriateness of valuation methodologies and underlying assumptions.
• Assess whether third-party pricing and valuation services are reputable and whether management has adequately challenged their output.
• Perform back-testing and sensitivity analyses to evaluate the reliability of key inputs.

The result is a robust audit process, with scrutiny on hard-to-value assets and a greater necessity to consult valuation specialists.

Testing of Fee Calculations and Disclosures

Auditors have a heightened sensitivity over fee structures, calculations, and disclosures to ensure consistency with governing documents and transparency. This includes:

• Tracing individual expense items to source documentation.
• Verifying that all fees are properly authorized and disclosed.
• Ensuring that related-party transactions and any offsets or rebates are transparently communicated.

Communication with Those Charged with Governance

Audit committees, boards, and members of management are briefed on the specific approaches auditors use and the key judgements they consider when evaluating fair value measurements and fee structures, emphasizing the SEC’s scrutiny in these areas. This communication helps ensure oversight, making certain that managerial bodies are aware of compliance risks and can take action as needed.

Enhancements to Financial Statement Disclosures

Detailed Fair Value Disclosure

Financial statements should include qualitative and quantitative disclosures relating to fair value. Specifically, among others:

• Descriptions of the valuation techniques and inputs for each material asset class.
• Disclosure of any changes in valuation policy or methodology, with explanations for the rationale.

Related-Party Transactions and Reporting

There is consistent regulatory scrutiny on related-party arrangements, requiring full disclosure of such transactions and their impact on fees, expenses, and valuations. Related party transactions, such as management and performance fees, as well as board and transaction fees earned from portfolio companies and dealings with co-investment vehicles, represent potential conflicts of interest for investment managers because they involve dealings between the investment manager and entities or individuals with whom they have a personal or financial relationship. Such relationships can compromise — or appear to compromise — the manager’s ability to act solely in the best interests of the investment fund and its investors. These transactions may create situations in which the manager’s judgment regarding investment decisions, pricing, or terms could be influenced by outside interests, leading to preferential treatment, unfavorable terms for the fund, or diminished transparency. To safeguard investors and maintain fiduciary integrity, related party transactions must be disclosed fully, reviewed independently, and subject to robust oversight and governance.

Conclusion

The SEC’s continued scrutiny of valuation and fee disclosures is a significant theme for alternative investment fund managers. Fund managers must continue to adapt by strengthening internal controls, investing in compliance infrastructure, and cultivating a culture of transparency. Auditors, in turn, are maintaining the bar on their procedures, focusing on areas of heightened regulatory and audit risk, and expecting robust financial statement disclosures.

While the changes involve significant effort and expense, the long-term benefits are clear: reduced regulatory risk, improved investor confidence, and a more resilient alternative investment industry.

Have questions about SEC examinations, fair valuation, or fee disclosures? Contact a CBIZ professional to discuss your specific situation.