Speaking before the Private Equity International Private Fund Compliance Forum, Securities and Exchange Commission Office of Compliance Inspections and Examinations Director Carlo di Florio reminded the audience that investment advisers are fiduciaries to advisory clients, including client funds. He made his comments just as the SEC is preparing to start overseeing large private equity firm advisors. Di Florio was careful to emphasize that the views he was sharing were his own.
Per the Dodd Frank Wall Street Reform and Consumer Protection Act, private equity fund advisors must now register with the SEC. In the wake of this requirement, there are now nearly 4,000 investment advisers registered with the SEC. These private fund advisers offer advise on nearly 31,000 private funds with $8 trillion in assets.
Di Florio talked about how it was the responsibility of advisors of private equity firms to fairly allocate their expenses and fees. He said must pinpoint any conflicts related to the structure and kinds of investments that their funds usually make and ensure that these conflicts are correctly “mitigated and disclosed.” Regarding the need for pooled investment vehicle advisors to make sure that material facts are disclosed to current and potential investors, he said that to do otherwise could constitute securities fraud.
Compliance obligations that large private equity firm advisors must fulfill include:
• Per the “Compliance Rule,” implement written procedures and policies designed to stop violations of the Advisers Act and the rules adopted by the SEC under that act.
• Per the “Books and Records Rule,” ensure that books and records are accurate.
• Annual completion of Form ADV registration forms
• As designated by the “Code of Ethics Rule,” adopt an ethics code that establishes standards of business conduct
• Abide by the “Advertising Rule” and not issue any false or misleading advertisements with any statements of material fact that are not true.
Di Florio also spoke about how it was the responsibility of private equity fund advisers to assess their risk management processes. This includes determining whether the firm has an assurance program that is independent, the business units are able to effectively handle risks at the fund level, and the organization has the proper structure and staff in place to adequately establish its risk parameters. He said that it was important to develop a culture of effective risk management, supervise risk-based compensations systems, and ensure that essential compliance, control, and risk management functions are properly integrated into the organization’s structure while still retaining the necded autonomy to be able to manage, identify, and mitigate risk.
Regarding National Exam Program’s risk-based approach in looking at registered advisers, he spoke of several “risk characteristics” that would likely be examined, including key personnel changes, the regulatory history of a firm or its staff, and material changes involving business activities. As risk-based analysis might apply to private equity during an examination, he said that the strategy of the fund, investor disclosures about “ancillary fees, and the reliability and sophistication of the funds’ processes would be among the factors likely examined.
Contact Shepherd Smith Edwards and Kantas, LTD LLP today. Our securities fraud attorneys represent investors that have suffered losses because a broker-dealer, broker, or investment adviser did not meet their fiduciary obligations to these clients.
More Blog Posts:
FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty, Institutional Investor Securities Blog, November 28, 2011
AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty, Stockbroker Fraud Blog, April 14, 2012