FORTUNE -- For decades, private equity funds have collected "transaction fees" from their portfolio companies, often related to mergers or initial public offerings. Sometimes they share with their investors, sometimes they don't. Sometimes the fees are for tens of thousands of dollars, sometimes for tens of millions. Either way, the practice gooses positive returns and lowers the losses from lousy ones.
Back in April, however, an SEC attorney named David Blass threatened to upset the gold-plated apple cart. He gave a speech arguing that private equity firms receiving transaction fees should be required to register as broker-dealers, rather than simply as investment advisors. In short, he used private equity's own justification against it: If private equity charges transaction fees in lieu of hiring an outside investment bank, then that would mean that private equity is doing the work of an investment bank and should be similarly categorized for regulatory purposes.
Blass's comments sent shock waves throughout private equity. Complying with broker-dealer registration is costly, and opens up a depth of regulatory scrutiny to which private equity is unaccustomed.
What we didn't know at the time was that Blass's speech came after the SEC had received a whistleblower complaint from someone within the private equity industry, privately alleging what Blass would soon discuss publicly. The complaint was first reported yesterday by Crain's New York, which only identified the whistleblower as a "senior private equity insider," and added that he or she stands to collect up to 30% of any related proceeds from SEC penalties.
Earlier this morning I spoke with the whistleblower's attorney Jordan Thomas, a former SEC official and current partner with Labaton Sucharow. He tells me that his client is indeed a senior private equity exec ("not a service provider") and that his or her firm is unaware of his client's identity. Thomas adds that the complaint specifically names several firms, although he declined to name them.
Thomas says that he has no personal opinion on the appropriateness of transaction fees in general, but clearly believes that private equity firms have been violating securities laws by charging them without first registering as broker-dealers. And given how much money private equity firms are managing – not to mention those on the other sides of buyout deals – he believes greater oversight is appropriate.
"No one is really monitoring or examining what these funds are doing, often including their own investors," Thomas explains. "If an investor thinks something is wrong, their only real way to get information is to file suit. And then they risk losing access to that fund, and others, in the future."
Private equity's counterargument is twofold. First, private equity funds are acting on their own behalf, rather than as a third party whose only involvement in the transaction is as a middleman. If one corporation sells assets to another corporation without the use of investment banks, for example, there is no law requiring the corporations to register as broker-dealers. As to Thomas' broader point, private equity sources point out that the industry already is regulated via the investment advisor rules -- something PE fought, and lost, as part of Dodd-Frank -- and that any additional oversight would have to be codified by Congress, not the SEC.
What's particularly interesting about this battle is that it comes as private equity funds are sharing more and more of their fees with limited partners, such as public pension systems, university endowments and nonprofit foundations. In fact, more than 60% of funds closed since the beginning of 2012 rebate every dime of transaction fees to LPs. If private equity firms are required to register as broker-dealers because of transaction fees, many might just choose to exclusively hire investment banks -- thus transferring cash from LPs to Wall Street.
At the same time, there are persistent concerns that private equity funds don't always disclose the existence of all incoming fees and, as Thomas said, LPs have little investigatory power outside of court-ordered discovery. Broker-dealer registration may solve this problem for LPs, although the peace of mind may be offset by the decreased fee income. In other words, would investors rather get most of all fees or all of no fees?
For Jordan Thomas and his client, however, it comes down to a question of current law, which they see as black-and-white. "Private equity firms have all the hallmarks of being broker-dealers, but they haven't been registering as broker-dealers," Thomas says. "It's really that simple."
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