JUNE 2023: SEC Enforcement Actions Related to Private Fund Advisors

Compliance Best Practices Based on Recent SEC Enforcement Actions Related to Private Fund Advisers 

Fund Audits

The SEC charged a number of investment advisers that failed to comply with the Custody Rule requirements and/or to timely update their SEC disclosures to reflect the status of audits of financial statements for the private funds they advised. 


Compliance Takeaways

Private Fund Advisers need to ensure that audits are being performed where required and as disclosed. Further, Private Fund Advisers need to verify that audited financials are delivered in a timely manner to investors. Additionally, if at the time of the ADV annual amendment, the Private Fund Adviser indicated a Fund had not received their audited financials, the ADV is required to be amended promptly when the audited financials are received. Promptly, is generally considered to be within 30 days of receiving the Funds audited financials. 


Pay to Play

Private Fund Advisers were charged with violations related to the Pay to Play rule. One violation was related to a $1,000 contribution to candidate for Governor of California by a covered associate when the Regents of the University of California was an existing investor. Another violation was in relation to $1,000 and $400 contributions to a candidate for Mayor of New York by two covered associates when the New York City Employees’ Retirement System and the Teachers’ Retirement System of the City of New York were existing investors. 


Compliance Takeaways

Private Fund Advisers need to be vigilant in training and requiring pre-clearance for political contributions.  In both of these instances, if the employee had pre-cleared and the CCO/Firm rejected the pre-clearance it would have prevented the enforcement action by the SEC.  


Management Fee Calculations and Expense Allocations

The SEC charged a Private Fund adviser who failed to properly offset management fees charged to a private equity fund it managed and failed to adequately disclose to investors and potential investors. Specifically, the Private Fund Adviser borrowed nearly $1.1 million from a private equity fund that it managed in order to pay placement agent fees to a third-party vendor. The offering and governing documents for the relevant fund and its affiliated vehicles required prompt repayment of the loan through an offset of the quarterly management fees the Adviser charged the fund. The Adviser did not offset any of the money borrowed from the fund against management fees for 11 consecutive quarters. 

There were also a number of additional recent SEC enforcement cases related to the miscalculation of management fees and expense allocations.  


Compliance Takeaways

Private Fund Advisers should regularly review fee calculations for accuracy and in accordance with how fees are disclosed to investors. Additionally, Private Fund Advisers need to first review expense allocations to make sure they are in line with the Funds offering documents. Secondly, they have to review to make sure the expense allocation is in the best interest of the Client.  


Please contact Aspect Advisors at [email protected] or reach out to your consultant team to discuss any of the topics noted in this article.  

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