When should newly registered private fund managers expect to be examined by the SEC?

The question on the minds of all new registrants. We now have the answer. Many should expect and prepare to be examined potentially this coming fall. At the GAIMOPs conference on April 23, 2012, Carlo di Florio, the Director of the Office of Compliance Inspections and Examinations (“OCIE”), indicated that private fund advisers could expect to see a series of exams this coming fall.


While much of what we hear from the SEC with regard to examination focus areas and risk focused exams is not new information, speeches given by SEC staff can sometimes offer small glimpses of new insight.

Carlo di Florio has recently provided a timeline of SEC actions stating, “We will have an initial phase of industry outreach and education, sharing our expectations and perceptions of the highest-risk areas. This will be followed by coordinated examinations of a significant percentage of new registrants, focusing on highest risk areas of their business, and helping us to risk-rate the new registrants. Finally, we intend to culminate in the publication of a series of “after-action” reports on the broad issues, risks and themes identified.” 

This “initial phase of industry outreach and education” includes the Compliance Outreach National Seminar in January 2012 and more recent speeches as well (see summary of recent speeches and links to the full text provided below).   Subsequent to the series of exams that will likely begin in the fall, we expect to see more feedback from the SEC regarding regulator expectations and best practices.

In recent speeches, Carlo di Florio and Norm Champ, the Deputy Director of the OCIE, both stressed the importance of three primary areas of focus for private fund advisers:

  1. Fair allocation of fees and expenses between the adviser and the funds it advises (and among funds) and disclosure of such allocation
  2. Thorough identification, disclosure and mitigation of conflicts of interest (the SEC provided several examples of conflicts of interest commonly seen and spent a great deal of time discussing the importance of disclosing and addressing conflicts of interest)
  3. Risk assessment and management including making sure that the adviser has an independent assurance process in place, whether through an internal audit department or third party performing a comparable function by independently verifying the effectiveness of the firm’s compliance, control and risk management functions.

In addition, the SEC advised private fund advisers to:

  • Effectively review compliance procedures at least annually and test them periodically
  • Enhance personnel expertise, ensure that employees are knowledgeable about their work and update and train them about new rules and regulations
  • Verify client assets and make sure adequate due diligence of service providers is performed
  • Provide clear, complete and accurate disclosure in performance and advertising
  • Verify portfolio management compliance including reviewing trades for unusual performance relative to peers and markets and compare trades to restricted lists
  • Address investor complaints
  • Check IT security to ensure that client assets and information are not at risk
  • Prepare for Form PF, which will provide the SEC with additional information on private fund advisers.

If you would like to discuss any of these speeches and what they mean for your firm, please give us a call.  

You can access the full text of the speeches here:

http://www.sec.gov/news/speech/2012/spch051112nc.htm

http://www.sec.gov/news/speech/2012/spch050212cvd.htm

http://www.sec.gov/news/otherwebcasts.shtml