On April 19, 2016 the SEC held its National Compliance Outreach Program for funds and advisers. The seminar focused on providing compliance and regulatory guidance to fund and adviser CCOs, direct from the Staff. These seminars occur every other year and provide CCOs with a live forum to ask questions of the Staff. This year’s seminar was insightful in that it showed just how much the SEC is still focused on the private fund arena as well as stepping up its adviser exam program overall.
According to Chair White, the National Exam Program (NEP) will move over 200 examiners from its broker-dealer exam oversight division to its investment adviser exam program. The SEC is also increasing its use of “big data” to identify high risk firms. For example, NEP is relying on selected criteria such as specific trading activity to pre-select registrants for examination. NEP is also increasing its use of exam referrals, which were up 10% last year.
Private fund issues were heavily emphasized during the seminar. Almost every panel spoke to private fund issues of some kind. The only attendee handout materials were for a panel specifically addressing private funds entitled “Private Fund Adviser Topics.”
Key points made by the Staff regarding private fund issues are as follows:
- Private equity is still a huge focus of OCIE and these registrants are a target of examiners, especially for “conflicts exams” and “hidden fees.”
- Hedge funds are currently being viewed for liquidity terms that differ between fund classes.
- Fairness of both expense and trade/investment allocations between funds is still on the hot topic list.
- Valuations of side pockets (especially in volatile markets) are of keen interest to examiners.
- Compliance surveillance of the investment research process is under scrutiny; the SEC believes this is crucial to a successful compliance program.
- Examiners are looking at the “tone at the top.” They expect management to “buy-into” the compliance program and provide moral and financial support, as needed.
- Lastly, DISCLOSURE was brought up multiple times by several Staff members as the lead problem during private fund exams. Staff often finds that firm activities contradict fund disclosures found within LPAs and PPMs. Poor disclosure is often a key factor in the Staff’s decision on whether or not an issue is worthy of enforcement action.
Of interest was how much private funds issues controlled the discussion at this year’s seminar. Regulated investment company issues such as distribution in guise and fixed income liquidity were also discussed, as well as cybersecurity, but the conversations routinely reverted back to private funds. This may be due to the large number of questions from the audience about private fund concerns. It appears the audience reinforced to the Staff their need to focus on this area.
