OCIE’s Adviser Risk Alert Maps Out Future Exam Priorities

The SEC’s Office of Compliance Inspections and Examinations put out a seven-page risk alert recently based on observations from exams of private fund investment advisers. This encompasses private equity and hedge funds. It focuses on deficiencies and compliance issues in exams: investors paying more in fees/expenses than they should; falling victim to conflicts of interest; policy around MNPI. Most of the failures relate to inadequate disclosure of conflicts and the unequal treatment of different investors with many preferential investors getting better outcomes. In other cases, fees and expenses were allocated inconsistently with investor disclosures and agreements. Valuations were being inflated resulting in higher management fees.

The Code of Ethics rule requires written policies and procedures to prevent misuse of MNPI. Adviser employees are potentially at risk of exchanging MNPI with executives of public companies, consultants set up by expert networks, and value-added investors with “special knowledge” about investments. In addition, individuals without authorized access are sometimes able to access MNPI related to a private transaction in a public company. 

Many advisers are failing to address these risks and also to enforce policy controlling them. In addition, some are not monitoring personal trading in securities on restricted lists, and the receipt of gifts and entertainments from third parties relating to the business. In other cases, firms were failing to address those who had access to sensitive information who were then trading on that information. 

This is a clarion call to hedge and private equity funds for any impending regulatory exams and a warning to get their house in order at a time when there is a glut of MNPI. The current environment has weakened the usual protections around data access. Physical information barriers are under strain in a WFH scenario, especially when there is so much extra corporate activity on the credit side. You have been warned.