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Regulation and Compliance > Federal Regulation > SEC

SEC Finds Problems in Private Fund Advisor Exams

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What You Need to Know

  • Approximately 35% of all SEC-registered advisors manage approximately $18 trillion in private fund assets.
  • Some private fund advisors provided to investors or prospective investors misleading track records.
  • The size and complexity of private fund advisors vary widely.

The Securities and Exchange Commission released Thursday a risk alert detailing concerns found among private fund advisors during exams.

The alert details more observations found by SEC exam staff regarding private fund advisors’ failure to act consistently with disclosures, use of misleading disclosures regarding performance and marketing, due diligence failures relating to investments or service providers, and use of potentially misleading “hedge” clauses.

“Examinations of private fund advisers have resulted in a range of actions, including deficiency letters and, where appropriate, referrals to the Division of Enforcement,” the alert states.

As the alert states, more than 5,000 SEC-registered investment advisors, approximately 35% of all SEC-registered advisors, manage approximately $18 trillion in private fund assets.

“In the past five years alone, we have observed substantial growth in reported private fund assets, which have increased by 70% in that period,” the SEC said. “These assets are deployed through a variety of investment strategies employed by hedge funds, private equity funds, and real estate-related funds, among others.”

The size and complexity of advisors vary widely from, for example, an advisor with a private fund limited to investors made up of friends and family, to an advisor with a worldwide footprint managing multiple private funds with hundreds of billions of dollars in assets, the agency explained.

Among other issues, the exam staff observed failures to act consistently with material disclosures to clients or investors. For instance, failures to obtain informed consent from Limited Partner Advisory Committees, Advisory Boards or Advisory Committees required under fund disclosures.

SEC staff also observed private fund advisers that did not follow practices described in their limited partnership agreements.

Another infraction: private fund advisors providing to investors or prospective investors misleading track records or other marketing statements that appear to violate Rule 206(4)-8.

In addition, “Advisers Act Rule 204-2(a)(16) requires advisers to maintain all accounts, books, internal working papers, and any other records or documents that are necessary to form the basis for or demonstrate the calculation of any performance or rate of return of any or all managed accounts or securities recommendations. Exams staff has also observed failures by private fund advisers to maintain these required records,” the alert states.


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