On Feb. 7, 2023, the Securities and Exchange Commission’s (SEC) Division of Examinations issued its 2023 examination priorities, which included, among other items, compliance with the new Marketing Rule, fiduciary obligation, Form CRS delivery, ESG investing and operational resiliency plans.
One key area of note? A focus on private fund advisers or private fund RIAs. According to the SEC, “RIAs to private funds represent a significant portion of the RIA population. Currently, more than 5,500 RIAs, totaling over 35% of all RIAs, manage approximately 50,000 private funds with gross assets exceeding $21 trillion. Private fund assets continue to grow. In the past five years, there has been an 80% increase in the gross assets of private funds, with retirement plans steadily contributing to this growth. These assets are deployed through a variety of investment strategies used by hedge funds, private equity funds, and real estate-related funds, among others.”
SEC exam priorities: A focus on private fund advisers
Due to the pace of continued growth, the Division made clear within their 2023 priorities its aim to examine and audit private fund advisers to ensure continued compliance with all regulatory requirements. Specifically, the Division plans to focus on the following areas of note during its examinations of such advisers:
- Conflicts of interest.
- Calculation and allocation of fees and expenses, including the calculation of post-commitment period management fees and the impact of valuation practices at private equity funds.
- Compliance with the new Marketing Rule, including performance advertising and compensated testimonials and endorsements, such as solicitations.
- Policies and practices regarding the use of alternative data and compliance with Advisers Act Section 204A.
- Compliance with the Advisers Act Rule 206(4)-2 (Custody Rule), where applicable, including timely delivery of audited financials and selection of permissible auditors.
The Division also stated it would focus its efforts on those firms which fall into the high-risk categories such as:
- Highly-leveraged private funds.
- Private funds managed side-by-side with BDCs.
- Private equity funds that use affiliated companies and advisory personnel to provide services to their fund clients and underlying portfolio companies.
- Private funds that hold certain hard-to-value investments, such as crypto assets and real estate-connected investments, with an emphasis on commercial real estate.
- Private funds that invest in or sponsor Special Purpose Acquisition Companies (SPACs).
- Private funds involved in adviser-led restructurings, including stapled secondary transactions and continuation funds.
Read the full 2023 SEC exam priorities to learn more about the continued focus areas for the Division of Examinations.
About the Author
Max Mejiborsky
Max joined NRS in 2007 as a Consultant in the Investment Adviser Services Department and is based in our Massachusetts branch office. Max delivers comprehensive compliance solutions to all types of investment management firms, with special emphasis on private fund advisers, including hedge funds, funds of funds, private equity and debt funds, venture capital funds, real estate funds and other pooled investment vehicles.
Max earned his Juris Doctor degree Cum Laude from Boston College Law School in 2002. He is a member of the State Bar of Massachusetts.
After graduating from law school, Max accepted a corporate associate position with Choate Hall & Stewart LLP. During his tenure at Choate Hall, Max specialized in secured financing transactions, mergers and acquisitions, and bankruptcy litigation.
Max received his Bachelor of Arts degree Summa Cum Laude, graduating Phi Beta Kappa from Tufts University with majors in International Relations and Eastern European Studies.