SEC Chair Mary Jo White, in a recent speech reflecting on the first 5 years of private fund sponsor registration, highlighted private fund operational and compliance risks that will draw SEC attention.
Ms. White underscored three specific operational risks: client transitions including fund liquidations (e.g. liquidation of illiquid assets, contractual rights, confidentiality); cybersecurity; and market stress (e.g. portfolio stress testing). Ms. White also warned private fund advisers to address specific compliance risks including marketing (e.g. support for performance presentations); disclosure of conflicts (e.g. allocations to proprietary funds and personal holdings); and charging of overhead expenses or undisclosed fees. Ms. White explained, “These risks are intertwined, and the strong compliance culture that individual private fund advisers build in carrying out their fiduciary duty is fundamental to the strength of the industry — and its ability to work with regulators, investors, and other market participants to foster a robust, resilient financial system.”
OUR TAKE: Most of these issues came from information collected during the presence exams of private fund managers that the SEC undertook soon after the passage of Dodd-Frank. As predicted, the SEC began bringing enforcement actions soon thereafter. Ms. White suggests the pace of examinations and enforcement will continue.