In a risk alert for private fund advisers, the SEC Division of Examinations highlighted compliance issues found during the 2020 exam period. The Division stated that the alert was meant to help SEC-registered investment advisers review and enhance their compliance programs.
Conduct Inconsistent with Disclosures
The Division said that its examiners observed issues with regard to material investor disclosures, including:
- failures to get informed consent from Limited Partner Advisory Committees, Advisory Boards or Advisory Committees required pursuant to fund disclosure rules;
- management fee calculations that did not adhere to fund disclosures, as well as failures to comply with liquidation, fund extension terms, and recycling practices described in fund organizational documents, resulting in erroneous management fees;
- fund investments that diverged materially from fund-disclosed investment strategies; and
- failures to announce "key person" departures in accordance with fund disclosures.
Performance and Marketing Disclosures
The Division said that its examiners observed violations of IAA Rule 206(4)-8 ("Pooled Investment Vehicles") and Rule 204-2(a)(16) ("Books and Records to Be Maintained by Investment Advisers"), including:
- the use of cherry-picked and inaccurate data, resulting in misleading track records and erroneous performance metrics;
- failures to maintain books and records about predecessor performance at other advisers, as well as material omissions and deceptive claims about such performance; and
- misleading advisor statements with regard to performance awards and unsupported claims of government supervision.
Due Diligence
The Division said that its examiners observed fiduciary failures, including:
- advisers that did not reasonably research investments and/or critical service providers in accordance with fund due diligence policies and procedures; and
- investment due diligence policies and procedures that were inadequately designed for a fund's investment strategy.
Hedge Clauses
The Division said that its examiners observed fund documents that misleadingly attempted to waive or limit fiduciary duties established by Advisers Act Sections 206(1) and (2) ("Prohibited Transactions by Investment Advisers").
The Division stated that its findings resulted in deficiency letters and referrals to the Division of Enforcement.
Commentary
The Risk Alert and the SEC's recently proposed amendments to Form PF signal an increased focus on the private funds industry. Many of the compliance deficiencies highlighted in the Risk Alert have been priorities for the SEC, including false or misleading fee disclosures. Advisers should review their policies and procedures, as well as disclosures in offering and marketing materials, in light of the issues noted in the Risk Alert.
Primary Sources
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