Overview of the SEC’s Office of Compliance Inspections and Examinations (OCIE) Risk Alert:

The SEC has recently issued a Risk Alert highlighting Observations from Examinations of Investment Advisers Managing Private Funds. This Risk Alert provides an overview of certain compliance issues observed by the Office of Compliance Inspections and Examinations (“OCIE”) in examinations of registered investment advisers that manage private equity funds or hedge funds (collectively, “private fund advisers”).

Over 36 percent of investment advisers registered with the SEC are private fund advisers. Based on hundreds of examinations conducted each year, OCIE highlights three areas of general deficiencies:

1. Conflicts of interest;
2. Fees and expenses; and
3. Policies and procedures relating to material non-public information (“MNPI”)

Conflicts of Interest:

Is your Conflicts of Interest Policy up to date? Have you identified all conflicts in your firm? The SEC recently highlighted that Conflicts of Interest was one of three areas of common deficiencies in their examinations of investment advisers managing private funds.

These conflicts include:

• Allocation of investments;
• Financial relationships between investors or clients and the adviser;
• Preferential liquidity rights;
• Adviser interests in recommended investments;
• Co-investments;
• Service providers;
• Fund restructurings; and
• Cross-transactions

Fees and Expenses:

Fees and Expenses have been on the SEC’s radar for some time. As a private fund adviser, are your fees and expenses permissible and consistent with your disclosures?

These issues include:

• Allocation of fees and expenses;
• Operating partners;
• Valuation; and
• Monitoring board fees, deal fees and fee offsets

Material Non-Public Information (MNPI):

Will your policies on insider trading and the use of MNPI meet the expectations of the SEC? Have you adequately identified the risks of the misuse of MNPI to your business? Is your Code of Ethics up to date?

The deficiencies related to MNPI and the Code of Ethics include:

• Inadequate policies and procedures;
• Identification of risks;
• Enforcement of the restricted list; and
• Failure to enforce the Code of Ethic

You can see the SECs full Risk Alert announcement here.

Need help understanding the SEC’s expectations and reviewing your policies and procedure? Contact us for pragmatic assistance in assessing your compliance policies and procedures against OCIE’s observations detailed in the Risk Alert.

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