The Securities and Exchange Commission’s (SEC) current review of private equity firm asset valuation and fund marketing  is focusing on smaller firms to the exclusion of the large, publicly traded companies. Two of these include Blackstone Group LP and  and KKR & Co.

Neither firm has received SEC requests for information.

In a Dec. 8 SEC letter sent to numerous firms, the regulator asked for information on fund investments, the valuation of assets and client communications, according to Bloomberg. They were also interested to see if the firms utilized “inflated valuations” to interest investors while marketing new funds.

Regarding its firm requests, the SEC said, it “should not be construed as an indication by the commission or its staff that any violation of the federal securities law has occurred, nor should it be a reflection upon any person, entity or security.”

The SEC audit comes from a two-year-old asset management task force that set out to look at private equity firm practices including asset valuation and conflicts of interest with hedge funds. At the time, SEC enforcement director Robert Khuzami said the agency wanted to keep tabs on the increasing numbers of investment advisers under its review.

Khuzami added that investigators would focus on the asset managers who regularly report above-market returns.

This private equity focus is atypical for the SEC. From their client base of sophisticated investors and private placements, the firms are exempt from SEC registration but the agency can invoke a private equity managers’ fiduciary duty to their funds, according to Bloomberg.

In addition, private equity funds have some leeway in valuing their portfolios, but this valuation is is still accountable to the fiduciary duties the general partner owes the fund, according to a Private Equity International report.

Additions Issues to Review

In addition to the information outlined in the Dec. 8 letter, SEC investigators are also reviewing possible problems with firms’ systems. These firms put together investor money to purchase companies, usually through debt. Then, they either sell or take the companies public.

Firms make money by charging annual management fees of 1.5 percent to 2 percent from committed funds while taking 15 percent to 20 percent of the investment’s profit.

At issue, according to Carlo di Florio, head of the SEC’s office of inspections and examinations, is a firm’s consistency and comparability of its valuation methods, disclosing it pricing methodology and its unrealized performance.

Di Florio said, “There are likely to be conflicts of interest over how investment valuation is calculated, whether in reporting performance to fund investors or in marketing materials for raising capital for new funds.”

In addition, the regulator said gross conduct may transpire, including misrepresented reports to either current or prospective investors on a fund’s performance through selective portfolio companies while excluding the under performing ones.