Private-equity firms, after decades of operating with limited regulatory scrutiny, are facing possible sanctions and tighter oversight after the Securities and Exchange Commission uncovered improprieties at most firms.

The SEC found illegal fees or severe compliance shortfalls in more than half of the firms it examined since starting a review of the $3.5 trillion industry two years ago, Drew Bowden, head of the SEC’s exam program, said in a speech yesterday. Bowden’s remarks foreshadow significant changes in how the industry operates, said Jay Gould, head of the investment-funds team at law firm Pillsbury Winthrop Shaw Pittman LLP in San Francisco.

“There will be several significant enforcement actions, enough to where the message will be pounded home loud and clear as to what is acceptable and what is not,” Gould said.

Private-equity firms have enjoyed limited oversight since gaining prominence in the 1970s as partnerships of investment managers who raised money to take over companies. That changed in 2010 when the Dodd-Frank Act gave the SEC greater oversight of private funds, which are typically only open to institutions and wealthy investors.

“Because of the structure of the industry, the opaqueness of the private-equity model, the broadness of limited partnership agreements and the limited information rights of investors, we are perceiving violations despite the best efforts of investors to monitor their investments,” Bowden said. “If we’re not on the job, doing exams in this area and spreading sunshine, these problems, which involve significant sums of money, are more likely to persist.”

‘More Emphasis’

The SEC, which created a special unit of staff to inspect buyout firms, started the exams in October 2012 and plans to have scrutinized 275 groups by year-end. Private-fund managers are also now required to file confidential reports, allowing regulators to monitor activity that could threaten the broader economy.

“There are more compliance considerations because it’s an industry that historically hasn’t been regulated by the SEC,” said Dwight Quayle, a partner at law firm Ropes & Gray LLP in Boston. “While there’s a bit of wait-and-see attitude about some of these things, certainly there is more emphasis on compliance.”

Ken Spain, a spokesman for the Private Equity Growth Capital Council, which represents more than 30 firms, declined to comment on the SEC’s findings. Among the PEGCC’s members are the world’s biggest buyout firms, including Blackstone Group LP, Carlyle Group LP, Apollo Global Management LLC and KKR & Co. Bowden didn’t name any of the firms that have been examined.

Compliance Costs