Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

On January 30, 2014, the SEC held a compliance outreach seminar for investment advisers.  Much of the SEC presentation focused on concerns related to advisers to hedge funds and private equity groups.  While many of the concerns are not new, the presentation is a useful summary of areas of SEC focus.

Key areas of focus in presence exams include the following:

  • Investment Conflicts of Interest
    • Personal and affiliates’ transactions (private equity)
    • Allocations of investment opportunities (private equity and hedge funds)
    • Fees to GPs/advisers and expenses to funds/portfolio companies
  • Marketing and Fund Raising
    • Placement agents (private equity and hedge funds)
    • Performance marketing (hedge funds)
    • Valuation
    • Custody

The materials reflect a concern about expense shifting– Moving expenses out of the  management company and into funds without proper disclosure and LP consent. Examples include:

  • Use of related party service providers which appear to be full members of a manager’s team (e.g. operating partners, senior advisers, captive consulting firms).
  • Automating standard processes with costs paid by funds (SAAS).
  • Outsourcing traditional back office functions to related parties (i.e. accounting, legal, risk).

Marketing concerns discussed include managers stretching for capital may overstate or

misstate material facts.  Examples include:

  • Improperly constructed interim valuations.
  •  Improper attribution disclosures, especially in cases of departing team members.
  • Key investment team departures, especially in cases of changes occurring immediately after closing.


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The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.