The SEC has visited a number of private equity fund managers over the past two years as part of its Presence Exam initiative. Among the SEC's stated areas of focus in these examinations has been conflicts of interest. On February 25, 2014, the SEC instituted administrative proceedings in this area, bringing charges against an Arizona-based private equity fund manager and his investment advisory firm for improper allocation of expenses to investment funds managed by them.

According to the order, the manager and his investment advisory firm improperly paid $3 million of the manager's personal expenses and the firm's business expenses using assets of private equity funds managed by them, without adequate disclosure of such payment arrangements to investors. The expenses included rent, salaries, employee benefits and bonuses for the investment advisory firm, as well as certain personal expenses of the manager. The manager and firm then allegedly loaned money to the private equity funds at unfavorable interest rates, pledging the funds' own assets as collateral for the loans, and also unilaterally modified the calculation of distributions to investors in certain of the funds, without disclosing such changes to the investors. Finally, the order alleges various misrepresentations by the manager, a colleague and the firm, as well as other custody and compliance violations.

The SEC's order seeks to halt the challenged expense payments and impose remedial actions on the firm and manager, including civil penalties and disgorgement of the expense payments in question.

In the SEC's Examination Priorities for 2014, released in January, the SEC noted that, as of September 30, 2013, over 200 Presence Exams had been completed and that it was on pace to meet its goal of touching within two years 25 percent of advisers newly registered with the SEC under the Dodd-Frank Act. The Examination Priorities note that the SEC will also seek to perform examinations of advisers that have been registered for more than three years but which have never been examined.