SEC Sets Its Sights on Private Fund Advisers

The U.S. Securities and Exchange Commission (SEC) recently announced that, in its fiscal year 2022, 760 enforcement actions were filed resulting in a record $6.4 billion in money ordered from SEC actions. A number of these enforcement actions involved a recently emerging area of focus for the SEC: private funds.

As noted in its release, the SEC considers private fund investments potentially subject to “certain recurring issues including undisclosed conflicts of interest, fees and expenses, valuation, custody, and controls around material nonpublic information.”

Examples of actions taken against private advisers include:

• Litigation against three portfolio managers who fraudulently concealed downside risks of a complex trading strategy which caused billions in losses to its investors.
• Charges imposed on registered fund advisers for failure to comply with the Custody Rule or update their Forms ADV to accurately reflect the status of audited financial statements.
• Charging a registered investment adviser for failing to properly offset management fees charged to private equity funds it managed and for making misleading statements to investors in those funds about fees and expenses being charged.

On the heels of this announcement, the SEC recently issued its Strategic Plan for FYs 2022-2026. The plan summarizes its goals over the next four years as: “protecting the investing public; maintaining a robust, relevant regulatory framework; and supporting a skilled and diverse workforce.”

The first two goals could potentially have a direct and material impact on the alternative investment industry.

SEC Initiatives and Areas of Focus

Goal 1: Protect the investing public against fraud, manipulation, and misconduct

Notable highlights

“The SEC must work to ensure the law is enforced aggressively and consistently.”

“The SEC’s examinations program will continue to focus on uncovering key risks and violations that could impact individual investors, from cybersecurity to private fund adviser conflicts of interest.”

“The markets have begun to embrace the necessity of providing a greater level of disclosure to investors” and, in response, “the SEC must update its disclosure framework to reflect investor demand.” Target disclosure areas include issuers’ climate risks, cybersecurity hygiene policies and people (i.e. management, executives, etc.).

Goal 2: Develop and implement a robust regulatory framework that keeps pace with evolving markets, business models, and technologies

Notable highlights

 “The SEC must enhance transparency in private markets and modify rules to ensure that core regulatory principles apply in all appropriate contexts.”

“The SEC must pursue new authorities from Congress where needed, continue to effectively collaborate with other regulators, and engage more proactively on digitization initiatives.”

Takeaways

Based on the contents of the SEC’s plan, its enhanced commitment to enforcement actions and specific scrutiny of private funds and their advisers should be considered the new normal. Advisers must continually assess whether they are sufficiently equipped to keep up with the rapidly changing regulatory environment through their in-house teams and outsourced service providers.

At Weaver, we understand the alternative investments industry and the challenges unique to the space. We enjoy consulting with firms at each stage of the lifecycle, from emerging managers to established advisers and mature funds. In addition to audit and tax services that are tailored to the unique needs of each adviser and its managed funds, Weaver also offers Asset Management Consulting services to assist retail and alternative asset managers with the many challenges they face in the fast-paced and rapidly evolving arena in which they operate, including compliance with new and existing regulations.

For more information about SEC compliance for private fund advisers, contact us. We are here to help.

Authored by Jeremy Winkler, CPA.

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