In the past five years, private fund assets have increased by 70%. As private fund advisers continue to play a larger role in the financial markets, the Division of Examinations (“EXAMS”) published a risk alert of their observations. The risk alert is intended to assist private fund advisers in reviewing and enhancing their compliance programs and to provide information about private fund adviser deficiencies. Key takeaways from EXAMS findings are below:
- Failure to Act Consistently with Disclosures
- Failure to obtain informed consent from Limited Partner Advisory Committees, Advisory Boards, or Advisory Committees (“LPACs”) required under fund disclosures, such as failing to bring a conflicted transaction to LPACs for review and consent prior to the transaction.
- Failure to follow practices described in fund disclosures regarding the calculation of Post-Commitment Period fund-level management fees.
- Failure to comply with Limited Partnership Agreements (“LPA”) liquidation and fund extension terms.
- Failure to invest in accordance with fund disclosures regarding investment strategy.
- Failures relating to recycling practices. “Recycling” refers to contractual provisions that allow a fund to add realized investment proceeds back to the capital commitments of investors.
- Failure to follow fund disclosures regarding the loss of key personnel.
- Use of Misleading Disclosures Regarding Performance and Marketing
- Misleading material information about a track record.
- Inaccurate performance calculations – including use of data from incorrect time periods, mischaracterization of return of capital distributions as dividends from portfolio companies, and/or projected rather than actual performance used in performance calculations.
- Portability – failure to support adequately, or omissions of material information about, predecessor performance.
- Misleading statements regarding awards or other claims.
- Due Diligence Failures
- Lack of reasonable investigation into underlying investments or funds.
- Inadequate policies and procedures regarding investment due diligence.
- Use of Potentially Misleading “Hedge Clause”
- Fund advisers that included potentially misleading hedge clauses in documents that purported to waive or limit the Adviser’s Act fiduciary duty except for certain exceptions.
WHAT DOES THIS MEAN FOR ME?
EXAMS observations can be used proactively by private fund advisers to review their practices and written policies and procedures. Designing, adopting, and implementing strong policies and procedures are essential and foundational to a successful compliance program.
If your business requires assistance identifying and addressing potential issues, meeting compliance requirements, or seeking further guidance on fund issues, Fairview can help. Our team of compliance experts can get your firm on track with a meaningful compliance program. Contact us today for more information about what Fairview can do for your business.