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SEC Finds Private Fund Advisor Compliance Snafus

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The Securities and Exchange Commission is finding a host of compliance concerns related to private fund advisors.

In a recent risk alert, the agency’s Office of Compliance Inspections and Examinations observed in recent exams that RIAs that manage private equity funds or hedge funds have deficiencies when it comes to conflicts of interest, fees and expenses, and policies and procedures relating to material nonpublic information.

Over 36% of investment advisors registered with the commission manage private funds, which frequently have significant investments from pensions, charities, endowments, and families, OCIE explains.

The areas of concern found by OCIE included:

Conflicts related to allocations of investments. The staff observed private fund advisors that did not provide adequate disclosure about conflicts relating to allocations of investments among clients, including the adviser’s largest private fund clients (flagship funds), private funds that invest alongside flagship funds in the same investments (coinvestment vehicles), sub-advised mutual funds, collateralized loan obligation funds, and separately managed accounts (SMAs)

Inaccurately allocated fees and expenses. For example, advisors allocated shared expenses, such as broken-deal, due diligence, annual meeting, consultants, and insurance costs, among the adviser and its clients, including private fund clients, employee funds, and coinvestment vehicles, in a manner that was inconsistent.

Deficiencies, such as private fund advisors that failed to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of receipt of fees from portfolio companies, such as monitoring fees, board fees, or deal fees, or MNPI. For example: Advisors did not address risks posed by their employees interacting with: insiders of publicly traded companies, outside consultants arranged by “expert network” firms, or “value added investors” (e.g., corporate executives or financial professional investors that have information about investments) in order to assess whether MNPI could have been exchanged.


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