You have likely heard all or some of these concerns before. Securities and Exchange Commission Chair Mary Jo White spoke at a meeting of the Managed Funds Association and pointed out areas of concern.
One thing to note is Chair White stated that the Private Funds Unit in OCIE is completing a review of private fund real estate advisers. (I assume you would call that a “sweep.”) That particular focus is related-party service providers. SEC staff is concerned that disclosure about these related-party arrangements may be non-existent or potentially misleading, particularly with regard to whether or not the related parties charge market rates.
We have heard that before from Marc Wyatt at PEI’s Private Fund Compliance Forum. It’s generally okay to use related-party service providers if the arrangement is properly disclosed. If the fund manager is going to say that it saves the fund money because the rate is at or below market rate, you need to prove that it actually is at or below market rate.
Chair White cited several other areas of interest for private fund compliance.
- Using marketing materials that included back-tested performance numbers, portable performance numbers, and benchmark comparisons without key disclosures.
- Disclosing conflicts related to advisers’ proprietary funds and the personal accounts of their portfolio managers, in particular allocation of profitable trades.
- Improperly shifting expenses away from the adviser and to the funds or portfolio companies by, for example, charging a fund for the salaries of the adviser’s employees or hiring the adviser’s former employees as “consultants” paid by the funds.
- Advisers collecting millions of dollars in accelerated monitoring fees without disclosing the practice.
- Advisers misallocating expenses to funds;[21]
- Failing to disclose loans from clients;[22]
- Using funds to pay their operating expenses without authorization and disclosure;[23] and
- Failing to disclose fees and discounts from service providers.[24]
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