The SEC's Private Fund Risk Alert (2022)

On January 27, 2022 the SEC issued a risk alert (the "Risk Alert) detailing a number of deficiencies by private fund advisers. Ira Kustin, a private fund attorney, explains the Risk Alert for TalksOnLaw. According to Kustin, the Devision of Examinations (referred to as "EXAMS") begins by focusing on the fiduciary duty of private fund advisers under the Investment Advisers Act of 1940 (“Advisers Act") including both a duty of care and a duty of loyalty. After pointing out that advisers must never subordinate a client’s interest to their own, the report goes on to detail four main areas of concern. The first deficiency (and the most extensively detailed) in the Risk Alert is "Conduct Inconsistent with Disclosures." In this section, the SEC points to a number of areas of concern including non-compliance with Limited Partner Advisory Committee obligations to issues with recycling investment funds or ignoring key person obligations. Ira explains the six sub-categories and provides examples and added color. The second deficiency in the report involves disclosures relating to marketing and performance. As Ira points out, this relates to the new SEC marketing rules but that at present, private fund advisers can either comply with the old rules or opt into the new rules. Ira explains some of the marketing related disclosure deficiencies of key interest to the EXAMS staff. The final two deficiencies listed relate to (a) due diligence and (b) hedge provisions. As Ira explains, due diligence when it comes to investments by private fund advisers may seem obvious but the SEC is highlighting it for a reason. Also, beyond performing adequate diligence, Ira explains that funds should also have procedures in place to document the steps taken to insure compliance. Finally, the report focuses on a deficiency relating to "hedge clauses." As the report points out, some private fund documents employ disclaimer language that purports to limit the advisors fiduciary duty. Ira explains that the EXAMS staff is reiterating that the private fund adviser's fiduciary duty to their clients cannot be waived. ► Watch on TalksOnLaw: https://www.talksonlaw.com/briefs/sec-2022-risk-alert-for-private-funds ► For more legal explainers and interviews with the titans of law visit https://www.talksonlaw.com ► Facebook: http://www.facebook.com/talksonlaw ► Instagram: http://www.instagram.com/talksonlaw ► Twitter: http://www.twitter.com/talksonlaw ____________________ SEC Private Fund Risk Alert January 27, 2022 – Interview Outline 0:00 Introduction of Private Funds Attorney, Ira Kustin 0:22 Investment Adviser’s Fiduciary Duty under the Investment Advisers Act 0:42 Conduct Inconsistent with Disclosures 1:06 Failure to Obtain Consent from Limited Partner Advisory Committees 2:22 Miscalculation of Post-Commitment Period Management Fees 3:47 Failure to Comply Liquidation and Fund Extension Terms 4:22 Failure to Invest According to Published Investment Strategy 4:27 Failures with “Recycling” Practices 5:25 Compliance with “Key Person” Provisions 6:18 Disclosures Regarding Performance and Marketing 7:44 Due Diligence 8:49 Hedge Provisions 9:38 Private Fund Advisers Risk Alert – Surprises