When Fee Offsets Go Wrong: The SEC’s Action Against TZP and What It Means for Private Fund Managers

A $680,000 settlement underscores how small errors in fee-offset calculations can become big fiduciary problems for private equity advisers.

Oct 07, 2025

On August 15, 2025, the U.S. Securities and Exchange Commission announced a settled enforcement action against TZP Management Associates, LLC, a New York–based private equity adviser, for violations tied to the handling of management fee offsets. SEC+2SEC+2

This case is an important reminder that even seemingly technical calculations around fee offsets and interest can trigger fiduciary liability — and underscores the continuing enforcement focus on transparency, alignment with fund documents, and conflict disclosure in the private funds industry.

What the SEC Found: Two Key Missteps

Here’s a simplified breakdown of the SEC’s findings and how TZP’s practices diverged from expectations.

1. Failing to include interest on deferred transaction fees in the offset

Under the limited partnership agreements (LPAs) governing the funds, TZP was permitted to receive “transaction fees” (broadly defined to include advisory, monitoring, or other portfolio-company fees). The LPAs required that the funds be credited (i.e. have offsets) equal to these transaction fees, effectively reducing the net management fees paid by the funds. Simpson Thacher & Bartlett+3SEC+3Proskauer+3
But TZP’s management services agreements with portfolio companies allowed those companies (under certain conditions) to defer paying those transaction fees, with interest accruing (typically at 8 % annually). SEC+3SEC+3Proskauer+3
When the deferred fees were eventually paid, TZP did not include the interest portion in the offset against management fees — i.e. the funds were credited only for the principal. Sidley Austin+3SEC+3Proskauer+3
Because the LPAs did not explicitly permit the exclusion of interest, the SEC viewed this as a conflict of interest and a failure of disclosure, even though the interest component arguably wasn’t enumerated in the contractual exclusions. SEC+3Proskauer+3SEC+3
The SEC attributed about $423,065 of over-charges to this practice. SEC+2Proskauer+2

In effect, TZP’s approach meant that the funds effectively gave TZP an interest-free “loan” during the deferral periods, because the interest income accrued to the adviser, not the funds. Sidley Austin+3SEC+3Proskauer+3

2. Double-counting (or duplicative reductions) when allocating transaction fees across multiple funds

The LPAs anticipated that when multiple funds managed by TZP invested in the same portfolio company, all of the transaction fees received by TZP should be treated as subject to offset, and then each fund’s offset would be adjusted based on its fully diluted equity interest in the company. Sidley Austin+4SEC+4Proskauer+4
But in at least one instance, TZP first allocated only a portion of the total transaction fees (based on each fund’s proportion of invested capital), instead of allocating the entire fee pool. Then, it imposed a further reduction based on each fund’s fully diluted equity ownership. SEC+3Proskauer+3Sidley Austin+3
That “double reduction” was inconsistent with the LPAs and reduced the offsets owed to the funds, thereby increasing net management fee revenue for TZP. Sidley Austin+3SEC+3Proskauer+3
The SEC attributed about $78,976 in excess management fees to this methodology. SEC+2SEC+2

Together, these two practices caused over $500,000 in excess management fees. Sidley Austin+3SEC+3SEC+3

Because TZP’s disclosures did not adequately flag these practices or the conflicts they entailed, the SEC found violations of Section 206(2) of the Investment Advisers Act (which prohibits an adviser from engaging in any transaction, practice, or course of business that operates as a fraud or deceit). Proskauer+3SEC+3SEC+3

Unlike some other SEC settlements, this did not include a finding under Rule 206(4)-7 (the compliance rule) or Rule 206(4)-8 (misleading statements), which in prior private funds cases are often leveled. Proskauer+2Sidley Austin+2

The Settlement: What TZP Will Do

To resolve the matter (without admitting or denying the findings), TZP agreed to:

A cease-and-desist order and censure. Proskauer+3SEC+3SEC+3
Payment of disgorgement of excess fees: $502,041, plus prejudgment interest of $6,836. Sidley Austin+3SEC+3SEC+3
A civil penalty of $175,000. Proskauer+3SEC+3SEC+3
In total, $683,877 is being deposited into a Fair Fund (escrow), from which distributions will be made to harmed investors (i.e. limited partners in the relevant funds). Sidley Austin+3SEC+3SEC+3
TZP must submit a methodology for calculating the payments, which the SEC will review and approve, and then distribute the funds (less any de minimis thresholds) within 90 days (absent extension) after approval of the payment file. SEC+1

Importantly, the settlement provides for distribution to harmed investors — not merely disgorgement to the U.S. Treasury. SEC+2SEC+2

TZP also cannot argue in any related private litigation that the civil penalty portion should offset compensatory damages awarded to investors (“penalty offset”). SEC+1

Why This Case Matters (Especially Under the New SEC Leadership)

1. No “big new theory” — but fidelity to the fee playbook

This case doesn’t herald a radical expansion of enforcement doctrine. Rather, it underscores that the SEC continues to enforce “bread-and-butter” fiduciary obligations — especially those tied to fee calculations, offsets, and disclosure. Freshfields Blog+3Proskauer+3Sidley Austin+3

Even though recent regulatory initiatives (e.g. new fund fee disclosure rules) have faced legal challenges, the SEC under Chair Paul Atkins is signaling that it will still hold private fund advisers accountable for misalignments between practice and contract, as well as hidden conflicts. Sidley Austin+2Proskauer+2

2. Liability on negligence, not just fraud

Because Section 206(2) does not require proof of scienter, the SEC can bring claims based on negligence or failure to act with due care. TZP was charged under that standard (not an intentional fraud standard). Sidley Austin+3SEC+3SEC+3

That means even unintentional or judgment-call errors in fee or offset calculation (if inconsistent with LPAs or not adequately disclosed) can lead to enforcement exposure. Proskauer+2Sidley Austin+2

3. Internal controls, documentation, and clarity of disclosure are nonnegotiable

The case illustrates that private fund managers must be meticulous in:

Ensuring their internal models, accounting systems, and operational practices faithfully implement LPAs and any relevant agreements
Periodically testing offset and allocation calculations
Clearly disclosing to LPs all sources of adviser compensation (including interest or deferrals) and the methodology for offsets
Monitoring conflicts of interest arising from deferral or payment timing dynamics

Some commentaries note it’s notable the SEC did not bring a compliance-rule violation (206(4)-7) in this instance, which may speak to calibrated risk assessment by the staff under the current regime. Proskauer+2Freshfields Blog+2

4. Even small numerical errors can attract scrutiny

To many, $500,000 is a modest sum in private equity. But the SEC’s willingness to bring this action suggests that even modest misallocations or improper offsets are not immune to regulatory attention — particularly where the errors are systematic, not isolated. Sidley Austin+2Freshfields Blog+2

This implies the bar for defensibility is high: advisers cannot rest on “materiality” arguments too readily when the issue is tied to clear contractual obligations and potential investor harm.

Takeaways for Fund Managers, GPs, and LPs

Review all governing documents carefully
Make sure LPAs, side letters, service agreements, and management services agreements are internally consistent and leave minimal ambiguity on offsets, exclusions, deferrals, and interest.
Map fee streams comprehensively
Anticipate all potential revenue streams (monitoring, transaction, advisory, deferred payments, interest) and explicitly address whether they are subject to offsets — and if excluded, confirm that exclusion is contractually authorized and disclosed.
Institutionalize testing and reconciliation
Build regular audits and reconciliation checks: compare “what the model says the offset should be” versus “what was actually booked.” Flag deviations and investigate.
Be transparent and candid with LPs
Disclose deferral arrangements, interest accrual, and allocation methodologies. If certain aspects are ambiguous, err on the side of disclosure or seek LP consent via advisory committees.
Stay current with SEC and industry developments
The SEC continues to emphasize fiduciary duty and fee transparency even as political leadership and regulatory priorities evolve. This case should dispel any notion that carefully documented fund managers are shielded from scrutiny.
Document everything
Memos explaining why a calculation was performed a certain way, decision logs around deferral elections, internal review sign-offs — such documentation may prove pivotal in both internal and external reviews.

Final Word

The TZP matter is a timely and instructive case, especially for private fund managers operating in an environment of evolving SEC priorities. It reinforces that fiduciary duties — and the obligation to align fee practices precisely with contractual and disclosure frameworks — remain under watch. Even relatively small numerical deviations, when systematic and undisclosed, can become the basis of enforcement.

If you’re working in fund operations, compliance, or fund governance, now is a good moment to audit your fee offset logic, understand where your obligations lie, and ensure that your disclosures and calculations leave little room for challenge.

Let me know if you’d like a shorter version for email, or a version aimed at LPs or compliance teams.

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