Ep. 102: Compliance Priorities for Private Fund Advisers

On Episode 102 of the CCO Buzz podcast, Sr. Compliance Consultant Maggie Tavares joins us to talk about recent Risk Alerts focused on Private Fund Advisers.


CCO Buzz: Hello and welcome back to the CCO Buzz! It’s the last episode of 2022- can you believe it? We hope you enjoyed your thanksgiving, and the holidays will be here before you know it. Today we’re in for a treat though, as we are joined by the life of the party herself, Senior Compliance Consultant, Maggie Tavares. She’s here to discuss her article from last month, “Compliance Program Enhancements Mandated for Private Fund Advisers.”

With that, let’s begin…

So, Maggie. Can you provide listeners with the reason why Private Funds are such a hot topic in the industry?

Maggie Tavares: Oh, that’s easy one to explain. It’s just simple facts – over $18 trillion dollars in private fund assets is managed by 35% of all SEC-registered investment advisers which is a notable 70% increase from the prior five years.  This large industry variance unfortunately has created compliance vulnerabilities with issues observed by the SEC’s Division of Examinations or EXAMS. In fact, earlier this year the Division of Examinations issued a Risk Alert that continues the discussion from a previous 2020 Alert outlining several areas of concern. Accordingly, observations were noted from RIA examinations of those advisers managing private funds.

CCO Buzz: Ah ha! No wonder this topic is buzzing lately. Do you mind refreshing listeners minds on what was cited in the Risk Alert?

Maggie Tavares: Sure! I go into more depth in my article but, it encompasses duty of care and loyalty of the fiduciary standard and Interpretation, meaning where the adviser must, at all times, serve the best interest of its clients by not subordinating said interest to its own; as well as the considerations regarding Rules 206(4)-7 and 8.

The focus for Advisers Act Rule 206(4)-8 is on how investment advisers to pooled investment vehicles are (1) prohibited from making any untrue statement of a material fact or omitting to state a material fact necessary in light of the circumstances under which they were made, (2) the statement is not misleading, to any investor or prospective investor in the pooled investment vehicle; or (3) otherwise engaging in any act, practice, or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle.

While on the other hand, Advisers Act Rule 206(4)-7 also commonly known as the “Compliance Rule” requires registered investment advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules that the SEC Commission has adopted under the Advisers Act by the adviser or any of its supervised persons.


CCO Buzz: So Maggie, understanding all of this, what are some of the common deficiencies found in the industry?

Maggie Tavares: Well, in my article, I heavily focus on the lack of action by those advisers managing private funds with material disclosures for clients and investors. Fund disclosures often include limited partnership agreements, operating agreements, private placement memoranda, due-diligence questionnaires, side letters or other disclosures.  For example, fund advisers failed to bring conflicts to their limited partner advisory committees for review and consent in violation of written fund disclosures. Adding insult to injury, these failures also occurred after the transaction had occurred or obtained approval after providing their limited partner advisory committees with incomplete information in violation of their written fund disclosures.

Other cited deficiencies include providing inaccurate information to investors reflecting the status of key previously employed portfolio managers; failure to implement an investment strategy that diverged materially from fund disclosures causing funds to exceed designated leverage limitations, as well as disclosures regarding performance and marketing, due diligence, [and] hedge clauses. I do go into these areas a bit further in my article, so if you want more information, you’ll have to check it out.

CCO Buzz: Well, you heard it here folks – if you want more insight on the article, you’ll have to check out Maggie’s Risk Management Update exclusively on the Core Compliance website at www.corecls.com. Thank you so much for joining us in today’s episode, Maggie. May you and all of our listeners have a great holiday and a happy new year!

Well that’s it for this week’s episode. If you’d like additional information, please check out our website at www.corecls.com. You can also follow us on Facebook, LinkedIn, or Twitter @CoreCls. Thank you, and we hope you tune-in to next week’s episode of the CCO Buzz.



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