On the heels of the SEC’s proposed rulemaking seeking increased disclosure from private fund advisers in Form PF, [1] the SEC’s Division of Examinations (“Exam Staff”) released a risk alert on Jan. 27, 2022 (“Risk Alert”), [2] highlighting common deficiencies identified during its examinations of private fund advisers. [3] In the Risk Alert, the staff pointed out that there has been a significant increase in private fund assets under management over the last five years. This has also been a theme in recent speeches by Chair Gary Gensler and the SEC’s Director of the Enforcement Division, Gurbir Grewal, making clear that under the stewardship of Chair Gensler, the SEC and its staff will be focused on the activities of private fund advisers in the near term. The findings in the Risk Alert are consistent with what we have observed on examination of private fund advisers.
Four types of deficiencies are detailed in the Risk Alert: (1) failure to act consistent with disclosures, (2) use of misleading marketing materials, (3) failure to conduct adequate diligence of investments and service providers (including alternative data providers) and (4) the use of overly broad “hedge clauses.”
Many of the deficiencies described in the Risk Alert could have been avoided with more careful attention to the interplay between the manager’s operations, disclosures and policies. A review of marketing practices is also warranted, not only in light of the Risk Alert, but also because of the upcoming advertising rule change.
More broadly, private fund managers should carefully evaluate whether their practices are consistent with the positions described in the Risk Alert. Compliance professionals should also incorporate these points into the next annual compliance review and be prepared to address them with the Exam Staff in future examinations.
