Debevoise & Plimpton LLP put on an excellent seminar focused on enforcement actions against private equity funds.
Kenneth J. Berman
Each fund manager is designated with a risk rating by the Securities and Exchange Commission. The Form ADV filing gives the SEC the background to assign that rating for a likelihood to be in compliance or out-of-compliance with regulatory requirements.
Registration gives the SEC the ability to just show up and ask for information. Prior to registration, the SEC would have needed a subpoena. The goal of the presence exams is to visit 25% – 50% of the new registrants over the next 2 years. The exams seems to more heavily weighted towards private equity than hedge funds. Perhaps because many hedge funds had been registered before and the SEC is more familiar with the risks with hedge funds.
Exam Priorities in 2013 for Investment Advisers
– Conflicts of Interest Related to Compensation Arrangements
– Conflicts of Interest Related to Allocation of Investment Opportunities
“Presence” Exam Priorities
– Portfolio Management
– Conflicts of Interest
– Safety of Client Assets
• Conflicts of Interest
• Allocation of Expenses
• Fee Arrangements & Calculations
• Waterfall & Carry Distribution Calculations
• “Zombie Funds”
• In re Oppenheimer Asset Mgmt. Inc., et al, (March 11, 2013)
• In re Ranieri Partners LLC and Donald W. Phillips (March 8, 2013) and In re Stephens (March 8, 2013)
• In re Advanced Equities, Inc. (Sept. 18, 2012)
• In re Oppenheimer Asset Mgmt. Inc. (March 11, 2013)
• SEC v. Brantley Capital Mgmt., LLC et al. (Sep. 28, 2010)
• In re KCAP Financial, Inc., (Nov. 28, 2012)
• SEC v. Yorkville Advisors (Oct. 17, 2012)
Conflicts of Interest
• In re Crisp (Aug. 30, 2012) (Self-Dealing)
• SEC v. Resources Planning Group Inc. (Nov. 23, 2012) (Misuse of Client Funds)
Fees & Expenses
• In re Pinkas (Feb. 15, 2012) (Allocation of expenses)
• SEC v. Onyx Capital Advisors, LLC (April 22, 2010) (Improper Fee Arrangements)
State versus Federal Enforcement
States still have the ability to enforce anti-fraud laws against investment advisers and private funds. Just because you are exempt from state registration, you are not exempt from state enforcement.
Highlighted the Ranieri case where a finder stepped over the line and acted as a placement agent. The SEC not only brought an action against the finder, but also against the fund firm and its principal. The SEC seemed especially annoyed that the finder had been barred from acting as a broker.