Published on Jan 28th, 2022 |

On Thursday, January 27th, the Division of Examinations (“EXAMS”) released a risk alert on their observations from examining Private Fund Advisers.

There were 4 key areas examined during EXAMS observations:

  1. Failure to act consistently with disclosures.
  2. Use of misleading disclosures regarding performance.
  3. Due diligence failures relating to investments or service providers.
  4. Hedge clauses used were potentially misleading.

It is crucial to be consistent and not be misleading with disclosures, especially as it relates to performance.  Vigilant is well versed in the compliance requirements and risks specific to managing Private Equity Funds.

Scroll to the next section below to learn more about the 4 areas that EXAMS focused on.

Results on Private Fund Adviser Deficiencies:

  1. Inconsistencies with Disclosures to Clients or Investors
    • Practices relating to limited partnership agreements (“LPAs”), operating agreements, private placement agreements, due-diligence questionnaires, and side letters were not followed.
    • Calculation of fund-level management fees did not follow practices described in fund disclosures.
    • Required approvals to extend the terms of Private Equity Funds were not obtained.
    • Failure to invest in accordance with fund disclosures regarding investment strategy.
    • Failure relating to “recycling” practices which may have caused Private Fund advisers to collect management fees.
    • Failure to follow fund disclosures regarding adviser personnel.
  2. Disclosures Regarding Performance and Marketing
    • Inaccurate or misleading disclosures that included how the portfolio for the track record was constructed or how benchmarks were used.
    • Inaccurate performance calculation to investors.
    • Books and records were not maintained and updated.
    • Fund advisers made misleading statements regarding awards they received or characteristics of their firm.
  3. Due Diligence
    • Advisers that did not perform reasonable investigations of investments in accordance with their policies and procedures.
    • Policies and procedures were not maintained and tailored to their advisory businesses as it related to their due diligence.
  4. Hedge Clauses
    • Private fund advisers included potentially misleading hedge clauses in documents that purported to waive or limit the Advisers Act fiduciary duty except for certain exceptions.

Final Conclusion

The Division of Examinations (“EXAMS”) concluded stating that the examinations resulted in a range of actions that included deficiency letters.

A recommendation was made for Private Fund advisers to review their practices, and written policies and procedures, including implementation of those policies and procedures, to address the issues identified in this Risk Alert.

Vigilant’s experienced compliance professionals serve as outsourced CCOs and support in-house CCOs for numerous Private Equity Fund Advisers, including Private Equity, Real Estate, and Venture Capital Funds.

With the increased focus on the Private Fund industry, please be sure to contact Vigilant for guidance on how to address these concerns.

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