SEC Finds Deficiencies in Disclosing Conflicts of Interest and MNPI


The Office of Compliance Inspections and Examinations (OCIE) of the Securities and Exchange Commission (SEC) recently published the Risk Alert Observations from Examinations of Investment Advisers Managing Private Funds. 


The Risk Alert covers three general areas of deficiencies that the OCIE has identified in examinations of private fund advisers: conflicts of interest, fees and expenses, and policies and procedures relating to material non-public information (MNPI). The alert outlines concerns and compliance issues observed during examinations of registered investment advisers that manage private equity funds or hedge funds—and serves notice that the SEC will continue to put a high priority on customer well-being.


Although the risk alert is not a rule or a regulation, firms should take heed that these could likely be key points of review for upcoming exams. The alert notes “OCIE examinations of private fund advisers have resulted in a range of actions, including no- comment letters, deficiency letters and, where appropriate, referrals to the Division of Enforcement. In response to these observations, many of the advisers modified their practices to address the issues identified by OCIE staff. OCIE encourages private fund advisers to review their practices, and written policies and procedures, including implementation of those policies and procedures, to address the issues discussed in this Risk Alert.”


Conflicts of Interest


OCIE staff observed numerous conflicts of interest that appeared to be inadequately disclosed under Section 206 of the Advisers Act or Advisers Act Rule 206(4)-8, including conflicts related to allocations of investments, conflicts related to multiple clients investing in the same portfolio company, conflicts related to financial relationships between investors or clients and the adviser, conflicts related to preferential liquidity rights, conflicts related to private fund adviser interests in recommended investments, conflicts related to coinvestments, conflicts related to service providers, conflicts related to fund restructurings and conflicts related to cross-transactions. 


The OCIE found that the deficiencies found may have resulted in investors not being informed of relevant conflicts of interest concerning the private fund advisor and the fund. 


Fees and Expenses


The OCIE also found fee and expense deficiencies under Section 206 or Rule 206(4)-8 that may have caused investors in private funds to pay more in fees than they should have. The staff observed that fund advisors inaccurately allocated expenses and fees, did not provide adequate disclosure about the role and compensation of operating partners, did not value fund holdings in accordance to disclosed processes leading to overcharging management fees or did not properly manage portfolio company fees including monitoring fees, board fees, deal fees, or fee offsets. 


MNPI Policies and Procedures


OCIE staff found deficiencies under Section 204A of the Advisers Act in the establishment and enforcement of MNPI policies and procedures including failing to address the risk of the exchange of MNPI when employees interact with outside entities, the risk of employees obtaining MNPI though access to office space and systems, or employees who periodically had access to MNPI about issuers of public security.


OCIE staff also found deficiencies under Advisers Act Rule 204-A-1, observing fund advisers that failed to establish, maintain and enforce provisions in their Code of Ethics, including failing to enforce trading restrictions on securities, failing to enforce requirements around third-party gifts and entertainment, and failing to require timely submission of holdings reports and preclearance transactions.


MyComplianceOffice provides a single integrated solution to manage conflicts of interest as part of your Conduct Risk program. Our software can help you address the issues outlined in the recent risk alert by helping you to identify and mitigate potential Conflicts of Interest from the activities of employees, third parties and the company and automate your MNPI and Insider Trading policies & procedures and embed them within your business.


Ready to learn more? Let us know and one of our experts will be in touch.