The Silent Crisis: Governance and Compliance Failures in Small to Mid-Sized Private Equity and Fund Management Firms

In the shadow of high-profile regulatory actions against major banks, a quieter but equally consequential crisis has emerged in the private equity and fund management sectors. Small to mid-sized firms, often perceived as agile and innovative, are increasingly exposed to financial mismanagement and tax evasion risks due to systemic governance and compliance failures. According to a report by the SEC, fiscal year 2024 saw over 70 firms penalized for recordkeeping violations, with settlements exceeding $600 million in civil penalties. These cases, while not always involving tax evasion directly, reveal a broader pattern of operational fragility that creates fertile ground for misconduct.

The Recordkeeping Crisis: A Gateway to Mismanagement

One of the most alarming trends identified by the SEC is the widespread failure to preserve electronic communications, particularly in off-channel environments. For example, Stifel, Nicolaus & Company, Inc. paid a $35 million penalty for inadequate recordkeeping, while smaller firms like Marathon Asset Management LP faced scrutiny for lapses in managing material non-public information (MNPI). These failures not only violate securities laws but also erode transparency, making it easier for unscrupulous actors to exploit gaps in oversight.

The implications extend beyond regulatory fines. As noted in a 2024 analysis by Debevoise & Plimpton, poor recordkeeping compromises the SEC's ability to investigate potential tax evasion schemes, particularly in private funds where complex structures and opaque transactions are common. For instance, a 2025 enforcement action against a private fund portfolio manager revealed how misappropriated assets were funneled into a Ponzi scheme, with red flags ignored due to fragmented documentation.

Fiduciary Lapses and the Cost of Weak Governance

Governance failures in mid-sized firms often manifest as inadequate board oversight and inconsistent enforcement of internal controls. The SEC's 2024 enforcement results highlight cases where fund boards failed to scrutinize advisory agreements or monitor post-commitment fee calculations. In one notable instance, TZP Management Associates, LLC was charged for misinterpreting contractual obligations, leading to inflated management fees retained by the firm. Such cases underscore how weak governance enables financial mismanagement, even in firms with otherwise sound investment strategies.
Tax evasion risks are further amplified by the lack of robust compliance programs. A 2024 case involving a private equity firm and its affiliates illustrates this: the firm avoided prosecution after voluntarily disclosing violations of U.S. sanctions and customs fraud involving falsified invoices to reduce tariff payments. While self-disclosure led to leniency, the incident highlights how firms with inadequate compliance frameworks can inadvertently facilitate illicit activities.

Regulatory Shifts and the Road Ahead

The regulatory landscape for private fund managers has grown increasingly stringent in 2024–2025. The SEC's focus on core enforcement areas-such as fiduciary duty breaches and market manipulation-has intensified scrutiny of mid-sized firms. For example, a 2025 enforcement action against a registered investment adviser revealed how a former COO misappropriated $223,000 for personal expenses, with senior management failing to implement adequate oversight. These cases signal a shift toward holding not just firms but also individual executives accountable for governance shortcomings.

Meanwhile, the SEC's emphasis on self-reporting and remediation offers a potential lifeline for firms willing to invest in compliance. As noted in a 2024 report by Gibson Dunn, firms that proactively address issues-such as Qatalyst Partners LP, which avoided penalties through self-reporting-demonstrate that accountability can mitigate reputational and financial damage.

Conclusion: A Call for Systemic Reform

The risks of financial mismanagement and tax evasion in small to mid-sized private equity and fund management firms are not isolated incidents but symptoms of a larger governance crisis. With regulatory penalties reaching record highs and investor expectations for transparency rising, firms must prioritize modernizing compliance programs, enhancing board oversight, and adopting advanced technologies for recordkeeping. As the SEC's 2024 enforcement results make clear, the cost of inaction is no longer just regulatory fines-it is the erosion of trust in the entire private capital ecosystem.