SEC Finds Common Compliance Problems with Private Fund Managers
The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert that enumerates pervasive compliance violations committed by private fund advisers. OCIE highlights three broad areas of noncompliance: conflicts of interest, fees and expenses, and misuse of material nonpublic information. 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. The Risk Alert is “intended to assist private fund advisers in reviewing and enhancing their compliance programs, and also to provide investors with information concerning private fund adviser deficiencies.” OCIE reports that over 36% of registered investment advisers manage private funds.
For further reading, we recommend our guidance published back in 2016: 10 Private Equity Practices that Cause Regulatory Problems. When OCIE publishes these Risk Alerts, you can expect a sweep and subsequent enforcement cases. Private fund advisers need to get their compliance acts together before the SEC does it for them.