by Robin M. Bergen, Zachary L. Baum, and John Lightbourne
On June 23, 2020 the U.S. Securities and Exchange Commission (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) issued a risk alert (the “Risk Alert”) describing a series of compliance deficiencies it has identified in examinations of investment advisers that manage private equity funds or hedge funds.[1] The Risk Alert broadly focuses on three areas of deficiencies, conflicts of interest, fees and expenses, and protection of material non-public information (“MNPI”), and is notable for its focus on a subset of advisers, rather than on practices or rules that are applicable to all registrants. This approach is, however, consistent with OCIE’s stated priority for 2020 to focus on advisers to private funds that have a greater impact on retail investors and serves as a reminder that OCIE remains interested in sponsors of private funds, including private equity funds, even though Chairman Clayton and senior Enforcement Division Staff have made protecting “retail” and “Main Street” investors a priority. Moreover, the Risk Alert highlights deficiencies that, in OCIE’s view, would have caused investors in private funds to pay more in fees and expenses than they should have, or caused investors not to be informed of the relevant conflicts of interest concerning the adviser and the fund. This appears to us to be an effort to prompt private fund sponsors to review and enhance their processes or face enforcement referrals and investigations.