The SEC’s Office of Compliance Inspections and Examinations issued a new Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds.
OCIE highlights three areas of noncompliance in the Risk Alert:
- conflicts of interest,
- fees and expenses, and
- misuse of material nonpublic information.
OCIE lays out some of the conflicts that are particular to private funds. Allocation of opportunities takes the first spot. A bad thing is allocating limited opportunities to higher fee-paying clients. An ancillary bad thing is not disclosing that allocation policy to investors.
Along with allocation comes co-investment. The Risk Alert notes that some fund managers were not following their co-investment procedures are were not adequately disclosing policies on co-investment.
Some of the more significant deficiencies include unfair allocations of investment opportunities, inequitable fees, insider transactions with service providers and portfolio companies, preferential liquidity rights, secondary transactions, impermissible expenses, valuation, and unlawful access to proprietary systems.
Fees and expenses have long been a focus for examinations of private funds. To some extent, that was the fault of fund managers. They were less clear about fees and related-party transactions than they should have been. The Risk Alert runs through the typical list of items that fund manager compliance professionals have been focusing on for the last several years.
I would guess that OCIE published the Risk Alert because OCIE is planning to start another round of fund manager exams.
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