The SEC Office of Compliance Inspections and Examinations ("OCIE") identified compliance deficiencies and weaknesses observed in recent examinations of investment advisers managing private funds.
In a "Risk Alert," OCIE outlined three general areas of compliance deficiencies: (1) conflicts of interest; (2) fees and expenses; and (3) material non-public information ("MNPI") policies and procedures. OCIE identified disclosure issues and compliance deficiencies with respect to the following.
Conflicts of Interest:
- allocation of investments among clients;
- multiple client investments in the same portfolio company;
- client/advisor financial relationships;
- preferential liquidity terms in side letters;
- adviser interests in investments recommended to clients;
- investments made by co-investment vehicles;
- service providers;
- fund restructurings and "stapled secondary transactions"; and
- purchases and sales among clients (a/k/a "cross-transactions").
Fees and Expenses:
- allocation of fees and expenses;
- disclosing the function and compensation of operating partners;
- valuing client assets in accordance with (i) valuation processes and (ii) client disclosures; and
- receipt of fees from portfolio companies (e.g., monitoring fees, board fees, or deal fees).
MNPI:
- Advisers Act Section 204A MNPI policies and procedures, including failing to address interactions with public-company insiders, expert networks, and "value added investors"; and
- failure to establish and enforce restrictions in the adviser's code of ethics, including as to an adviser's "restricted list."
Commentary Nihal Patel
Though many of these matters are common concerns, the risk alert provides a useful checklist for compliance personnel at any investment adviser ("IA") managing private funds. The list should be closely reviewed and all such IAs should be prepared to respond to SEC queries as to its practices on each of these topics.
Originally published June 24, 2020.
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