Month: May 2012

Mishandling Fund Conflicts

Success or Failure Which?

The key aspect of registration under the Investment Advisers Act is managing conflicts of interest. The financial services industry is full of conflicts. Investment advisers owe a higher level of duty to their clients than broker-dealers. In the case of fund managers, they owe the duty to their funds. One particular concern is a transaction between an investment adviser’s funds.

The SEC recently issued a cease-and-desist order that highlights a fund manager that handled the conflict poorly. I’m assuming the facts in the SEC’s order is true, although Martin Currie neither admits nor denies the allegations in the complaint.

The main focus of SEC’s complaint is that Martin Currie used one fund to rescue another fund. That’s good for investors in one fund and bad for investors in the other fund.

Hedge Fund Investment

The problems began in June 2007 when Martin Currie caused its Hedge Fund to purchase a large quantity of illiquid bonds in a Chinese company: Jackin International Holding. That deviated from the Hedge Fund’s normal equities-trading strategy. Martin Currie realized the investment would cause the Hedge Fund to breach its self-imposed 5% limit on investments in unlisted securities. To cure that problem, Martin Currie obtained approval from the Hedge Fund’s board of directors to modify the 5% limit. However, Martin Currie may have failed to present all material issues and risks for the board’s consideration. After the deal closed, the high-yield Jackin bonds were improperly characterized as cash in the firm’s risk management system. Because of this misclassification, the liquidity and credit risks from the Hedge Fund’s exposure to Jackin were not appreciated at Martin Currie headquarters until after the Hedge Fund had purchased even more Jackin bonds. It’s not clear from the order whether the misclassification was intentional or accidental.

2008 Financial Crisis

Then the 2008 financial crisis rears up and causes a liquidity crunch in the Hedge Fund as investors redeem their interests.  As more liquid assets were sold off to generate cash for redemption, those illiquid Jackin bonds became an increasingly larger part of the portfolio.

Martin Currie also acted as the adviser to a closed end fund: the China Fund. It just so happened that the China Fund was working with a group investors to buy one of Jackin’s subsidiaries: Ugent Holdings. Coincidentally, the sale of Ugent would allow Jackin to repay the bonds held by the Hedge Fund.

Board Approval of the Transaction

The group at the China Fund decided they needed approval of the fund’s board to proceed with transaction. However, the SEC accuses Martin Currie of failing to properly disclose the conflict of interest when it sought the board approval. Board approval does not clear the conflict if the board did not know about the conflict. It’s even worse if the board approval is based on “incomplete and misleading representations.”

On top of the faulty approval, Martin Currie used some dubious pricing and rationale for the China Fund’s investment. Ugent and Jackin’s financial situation had detoriated as a result of the 2008 financial crisis and its earnings and profits had fallen sharply. But Martin Currie used eight month old financial data and due diligence. They pushed ahead without assessing whether the Ugent investment was good for the China Fund. (It certainly was good for the Hedge Fund.)

Second Approval

At the next regular meeting of the China Fund’s board, the Ugent investment was once again presented. Once again the description of the transaction failed to mention that the sales proceeds would ultimately end up in the hands of the Hedge Fund. The Hedge Fund’s bond investment was cashed out at par, solving its liquidity crisis. Now the China Fund was holding $22 million of illiquid convertible bonds of dubious value.

Board approval could have cured the conflict. Without disclosing the conflict, the board approval fails. I would have to assume the board would not have approved the transaction if it knew about the conflict.

Valuation Failure

To compound the problem, Martin Currie failed to follow its procedures for valuation of the shiny, new bonds. The China Fund had adopted FAS 157 and was supposed to value its holding at “fair value.” For non-traded, direct investments like these bonds, the China Fund’s policies called for a valuation at cost, unless there was a material change in value.

Martin Currie failed to point out to the valuation group that Jackin/Ugent was having serious financial problems. Jackin’s auditor issued a going concern warning and Martin Currie failed to inform the valuation group. On top of that the Hedge Fund was selling its remaining interests in Jackin.

Within 19 months of the investment, the China Fund wrote down the investment by 50%. A month later, it wrote it all the way down to $0.

Pointing the Finger of Blame

Although I used the name Martin Currie liberally above, the investment advice was coming from different units of the company and separate individuals in the organization.  Martin Currie cooperated with the SEC, including refunding losses incurred by the China Fund and refunding management fees. The firm also terminated an unidentified project manager who directed the misrepresentations to the board. I assume that project manager is subject to further investigation, perhaps by the investigators who can subject the project manager to jail time.

Even with the cooperation, Martin Currie was subject to a fine in excess of $8 million. From the press release, it sounds like the problem was discovered as part of an SEC examination and gives credit to an SEC examination conducted by Jason Rosenberg and Lucas Tepper under the supervision of Mavis Kelly.

To some extent, this case in another in a long string of cases where fund managers took in appropriate steps to stay alive during the 2008 financial crisis. There were no safe places to put money. The robust underwriting standards of the 2007 boom collapsed under the weight of a global financial crisis and a stark new reality. Some managers stepped up and did the right thing by investors, hoping they would appreciate the honesty. Others locked down the funds keeping investors from jumping into lifeboats, claiming the boat is just in rough waters and not sinking. Others took dubious actions trying to cover up their failings.

Remember that it was the redemptions from the 2008 financial crisis that finally brought down the Madoff ponzi scheme after years (decades?) of deceit. Even this master swindler could not hide from a global financial crisis.

Sources:

Image of Success or Failure is from Todd Ehlers

Compliance Bits and Pieces for May 11

These are some of the compliance-related stories that recently caught my attention.
SEC Whistle blower
A Shiny New Website for the S.E.C. by Kevin Roose in DealBook

Our favorite part of the site is the silver whistle pictured on the homepage. Emblazoned with the agency’s logo, the whistle is a nod to the S.E.C.’s status as the whistleblower of wrongdoing on Wall Street. (And would make a good gag gift for Harry Markopolos.)

When we asked Mr. Nester whether actual, S.E.C.-branded whistles were available for sale to the general public, he replied, “Unfortunately, the cool-looking whistle is available only as a jpeg.”

Why Companies Shouldn’t ‘Do’ Compliance by Dov Seidman in Forbes.com

To be truly effective in shifting behavior, and moving an organization forward, leadership must move from a “governance, risk and compliance” to a “governance, culture and leadership” mindset. Focusing on actions that will build and maintain a values-based system of “governance, culture and leadership” will mean less compliance activity, less cost, and more compliance as a result of real, tangible and sustainable behavior change.

Trust, or verify? by William Carleton

When startups and private companies raise money today from angel investors, they count on the investors to self-certify they are accredited.

Sure, companies might ask prospective investors to fill out questionnaires, and might otherwise draw attention to the significance of the investor’s rep (“these securities are being sold to you under a Rule 506 exemption, the validity of which is based, in part, on your representation to us that you are in fact accredited . . . “); but no issuer today asks to see the prospective investor’s tax returns, nor bank balances, nor the appraised value of her art collection.

The SEC, Accredited Crowdfunding, And The Art Of Hair Splitting by Joe Wallin

If this argument is going to inform the SEC’s rulemaking on this subject, and if the SEC believes that this is what the legislative history indicates should inform the rulemaking, then it is unlikely we are going to see a continuation or retention of a check-the-box or questionnaire regime for advertised offerings. However, for non-advertised offerings, perhaps the old regime can continue. And in fact, the argument can be made that it should continue because if there is no advertising then the heightened risk which prompted these verification processes be added won’t exist. Of course, it remains to be seen whether the SEC will require verification in just offerings in which there is general solicitation, or all offerings.

‘Say on Pay’ vote destroys $500MM+ in shareholder value by Marc Hodak in Hodak Value

Aviva’s shareholders, saw the departure of Andrew Moss, their CEO, after his pay package was voted down. While it’s difficult to interpret any given Say on Pay vote, it’s a fair assumption that these votes respond to headline news about a company. In the case of Aviva, the headline appeared to be “Insurer performing badly; CEO pay goes up.” So, here is what the shareholders have wrought: …

[T]he stock drop has cost Aviva’s shareholders over $500 million, even accounting for the general slump in the market over the last couple of days. The shareholder’s putative complaint was that the board had agreed to pay Mr. Moss a $1.86 million bonus, on top of his $1.55 million salary. So, it appears that the shareholders, in their trading capacity, have penalized the company with a half billion dollar CEO changeover cost because they believed, in their proxy voting capacity, that two million dollars was too much to pay their CEO in a bonus.

What is Private Equity? from the Private Equity Growth Capital Council

Is it a Security?

In my ongoing quest to distinguish what’s a security and what’s not a security, a new case came down from Missouri on the topic. Disgruntled purchasers of condominiums at the Branson Landing Hilton Promenade Boutique Hotel felt they got a bad deal and sued the seller/issuer to get their money back: Obester v. Boutique Hotel (.pdf)

The owners claim the seller/issuer represented that the condominiums would be rented out and they would receive a portion of the profits, generating substantial revenue. I assume the investment did not turn out to be a financial windfall. According to the claim, the hotel rented its inventory of unsold units at a discounted rate.

Fee simple ownership of the “bricks and mortar” of real estate is not a securities transaction. “The offer of real estate as such, without any collateral arrangements with the seller or others, does not involve the offer of a security.” As you move further away from that model, you move closer and closer to the ownership a security than the ownership of real estate. The line between the two is not a bright line.

As with the Hard Rock San Diego case still working its way through the federal courts in California, combining the sale of real estate with a management agreement starts making the real estate look like a security.

In the Boutique Hotel case, the court goes back to the Howey case and uses a four part test to determine if there is an investment contract, where there is

  1. an investment of money,
  2. a common enterprise,
  3. a reasonable expectation of profits, and
  4. a reliance on the entrepreneurial or managerial efforts of others.

The court draws a distinction between a vertical commonality and a horizontal commonality to create a common enterprise. Vertical looks at the relationship between the seller and the purchaser. Horizontal focuses on the pooling of interests among investors. It’s an interesting way to look at the analysis, but it ends up not being decisive to the court.

What kills the securities claim is that the owners were not required to participate in the rental program. An owner could chose to not rent out its condominium or rent it out on its own. That means the business arrangement did not have a reliance on the entrepreneurial or managerial efforts of others.

That distinguishes the arrangement from the one being contested in the Salameh / Hard Rock San Diego case. San Diego restricted the rental program to the one run by the seller/issuer. Under San Diego zoning, the units had to be sold for non-residential use and be managed as part of the hotel.

These cases do little to help me decide when an interest in a manager-managed limited liability company is a security. But it’s clear that there is still a big gray space between what is a security and what is not a security.

Sources:

Comments on Advertising Restrictions for Private Funds

Section 201 of the recently passed Jumpstart Our Business Startups Act will change the advertising limits on private funds and any other company that raises capital through the private placement safe harbor in Rule 506 of Regulation D. That rule has historically prevented the use of general solicitation and advertising in selling private fund interests. Section 201 requires the SEC to lift the ban through a new rulemaking and gave the SEC 90 days (July 4) to do so.

I still find it strange that Congress did not just create revise the underlying statutes to allow solicitation and advertising in private offerings not registered with the SEC. Instead, Congress took the convoluted route of requiring the SEC to change a rule that interprets a statutory provision of the Securities Act. That injects some uncertainty into what limitations, if any, the SEC will continue to require after July 4 (or whenever the new rule goes into effect).

There are a few other points in Section 201 that concern me and make me worry about fundraising in the post JOBS Act regulatory world.

First, Section 201 limits sales only to accredited investors when using general advertising or solicitation. Currently, a Rule 506 offering can have up to 35 non-accredited investors. That would typically include friends and family investors. It would also include employees.

Second, Section 201 requires the SEC to include a requirement that the issuer take reasonable steps to determine accredited investor status using methods determined by the SEC. That could radically change the current practice and safeguards in the fundraising process.

Third, I’m concerned what the effect will be for a fund or other issuer that ends up selling to a non-accredited investor. A fund can take reasonable steps to determine if a potential investor is accredited. But the investor could be deceptive. That would leave the fund in violation even though it reasonably believed the investor was accredited.

Fourth, Section 201 purports to lift the ban across all federal securities law. In particular, I’d prefer clarification that the advertising and solicitation applies to the Section 3(c)(1) and 3(c)(7) of the Investment Company Act that permits most private funds to avoid regulation under that law.

In looking through the comments letters to Section 201, I see that I am not alone in these concerns.

The American Bar Association’s Federal Regulation of Securities Committee does a a great job of focusing on my fourth concern and asks for a clear statement that “an offering of fund shares pursuant to Rule 506 or Rule 144A utilizing general solicitation or general advertising will not be a ‘public offering’ for the purposes of Section 3(c)(1) or 3(c)(7) of the Investment Company Act.”

The letter also requests clarification of the reasonable belief standard in the Rule 501 definition of accredited investor.

“any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person…”

The letter falls short in its comments to the verification practice. It merely asks the SEC to have the rule reflect “current custom and practice” without letting the SEC what the customs and practice is. (It’s asking the investor to fill out a questionnaire.)

In it’s comment letter, the Managed Fund Association focuses on reasonable steps for the verification process.

In general, each potential hedge fund investor must complete a subscription document provided by the fund’s manager that provides a detailed description of, among other things, the qualification standards that a purchaser must meet under the federal securities laws. In completing the subscription materials, each investor must identify which applicable qualification standard it meets. In addition to these procedures, many hedge funds managed by MFA members obtain further assurance of the qualification of their investors by virtue of minimum investment thresholds that meet or exceed the net worth requirement in the definition of accredited investor.

The Managed Fund Association also asks that the knowledgeable employee exemption be extended to Rule 506. With private funds, investors prefer (demand?) that senior management have a significant investment in the fund. This aligns interests among the investors and management. When operating under the Section 3(c)(7) exemption from the Investment Company Act, the issue then becomes how a private investment fund can provide an equity ownership to key employee when it’s unlikely that your key employees will have the $5 million in investments needed to qualify as  a Qualified Purchaser. The SEC established Rule 3C-5 to allow “knowledgeable employees” to invest in their company’s private fund without having to be a qualified purchaser. The rule also exempts these knowledgeable employees from the 100 investor limit under the Section 3(c)(1) exemption from the Investment Company Act. The Managed Fund Association recommends

that as part of the implementation of Section 201, the SEC amend the definition of “accredited investor” to include those individuals who meet the definition of “knowledgeable employee” in Rule 3c-5 under the Investment Company Act.

The New York City Bar splits the verification process by asking for a principle-based approach with a non-exclusive safe harbor. Their comment letter points out the body of existing practice and asks the SEC to build on it, rather than replace it.

The clock is ticking and the SEC has very little time to produce a proposed rule for comment. I wouldn’t be surprised to see the SEC miss the deadline given all of the other rule making piled up in front of them. That means the advertising may have to wait that much longer.

Sources – Comment letter from:

Gathering Information on Your Private Fund Investors

One item that I picked up from PEI’s recent Private Fund Compliance Conference is the new way you need gather information about investors in your private fund for Form PF. I put Form PF to the side because my filing is not required until next year. However, there is a key March 31, 2012 date in the Adopting Release for Form PF (.pdf).

In Section 1b, Item B. Question 16 (.pdf)Form PF  asks the manager to “specify the approximate percentage of the reporting fund’s equity that is beneficially owned” by the listed category of investors. You need to file Form PF if you listed private funds in your Form ADV.

The catch in the instruction is:

With respect to beneficial interests outstanding prior to March 31, 2012, that have not been transferred on or after that date, you may respond to this question using good faith estimates based on data currently available to you.
(my emphasis)

If you are fundraising now, it looks like you need to make sure your subscription documents require the investor to self-select their designation. I suppose you also need to do some diligence to make sure the selection is correct.

Even if you’re not fundraising, you need to address this change for any transfers in a private fund after March 31, 2012.

The analysis for which sections of Form PF you need to fill out is a bit complicated. But every private fund needs to fill out Section 16 and answer the question about the beneficial ownership of the fund. Every private fund needs to start gathering information about their investors using this data scheme:

(a) Individuals that are United States persons (including their trusts);
(b) Individuals that are not United States persons (including their trusts);
(c) Broker-dealers;
(d) Insurance companies;
(e) Investment companies registered with the SEC;
(f) Private funds;
(g) Non-profits;
(h) Pension plans (excluding governmental pension plans);
(i) Banking or thrift institutions (proprietary);
(j) State or municipal government entities (excluding governmental pension plans);
(k) State or municipal government pension plans;
(l) Sovereign wealth funds and foreign official institutions; or
(m) Investors that are not United States persons and about which the foregoing beneficial ownership information is not known and cannot reasonably be obtained because the beneficial interest is held through a chain involving one or more third-party intermediaries.
(n) Other

 

Sources:

Private Equity Real Estate Top 30 – 2012 Edition

Private Equity Real Estate just released its ranking of the top 30 real estate private equity fund managers. As I have done in the past, I parsed the list to see which managers are registered with the Securities and Exchange Commission as investment advisers. (Disclosure: my company is on the list.)

1 The Blackstone Group Registered
2 Morgan Stanley Real Estate Investing Registered
3 Goldman Sachs Real Estate Principal Investment Area Registered
4 Tishman Speyer Registered
5 Colony Capital Registered
6 The Carlyle Group Registered
7 Lone Star Funds (Hudson Advisors) Registered
8 Beacon Capital Partners Registered
9 Westbrook Partners Registered
10 LaSalle Investment Management Registered
11 MGPA Registered
12 Starwood Capital Group Registered
13 CBRE Global Investors Registered
14 AREA Property Partners Registered
15 Prudential Real Estate Investors Registered
16 TA Associates Realty Registered
17 Angelo, Gordon & Co Registered
18 Rockpoint Group Registered
19 Shorenstein Properties
20 Bank of America Merrill Lynch Global Principal Investments Registered
21 AEW Global Registered
22 Hines Registered
23 Brookfield Asset Management Registered
24 Lubert-Adler Real Estate Registered
25 JER Partners Registered
26 Grove International Partners Registered
27 CIM Group
28 Northwood Investors Registered
29 DRA Advisors Registered
30 Walton Street Capital Registered
Other Real Estate Fund Managers  —
GI Partners Registered
KSL Capital Registered
Aetos Capital Registered
Citi Property Investors Registered
Lehman Brothers Real Estate Private Equity Registered
Crow Family Registered
Jamestown, LP Registered
KK daVinci Advisers
Rockwood Capital Registered
RREEF Alternative Investments Registered
Rockefeller Group Registered

 

It still stands that 28 of the top 30 are registered with the SEC as Investment Advisers.

There are good arguments to be made on both sides of the registration debate for real estate funds. The core requirement under the Investment Advisers Act is that the manager is giving investment advice about securities. Most of these real estate fund managers are truly focused on real estate and not securities. However, the discussion between what is and is not a security may be fun for the first week of your securities law class in law school. It’s not a fun discussion when trying to comply with regulatory requirements.

The PERE 30 measures capital raised for direct real estate investment through commingled vehicles, together with co-investment capital, over the past five years.

Sources:

A New Era of Fundraising and Marketing

These are my notes from the a New Era of Fundraising and Marketing session at the Private Fund Compliance Forum 2012.

Panel Members:
Julia D. Corelli, Partner, Pepper Hamilton LLP
Kurt A. Krieger, Legal Director, Huntsman Gay Global Capital, LLC
Jason Ment, Partner, General Counsel & Chief Compliance Officer, StepStone Group LLC
Helane L. Morrison, General Counsel & Chief Compliance Officer, Hall Capital Partners LLC

False advertising is prohibited, regardless of whether your firm is registered. Puffery and misleading statements are prohibited. Until the JOBS Act’s new rules go into effect, a registered adviser cannot advertise or generally solicit. Facebook, twitter and bulk email is bad. You need a existing, substantive relationship before contacting someone to solicit a commitment as part of fundraising.

Testimonials are bad. You can’t have friends say great things about you in advertising. It’s not just testimonial about the investment manager, but testimonials about the portfolio companies. The panelists shared stories of SEC deficiency letters that specifically dinged managers.

Deal lists need to be based on objective criteria that does not skew the results. You can’t have a bad pattern.

You need disclosures that past performance is not an indication of future performance.

Performance numbers need to be net numbers and not gross numbers. None of the guidance is tailored to the private equity space where calculation of performance is very idiosyncratic.

The SEC has indicated that exams will be focused on performance information in marketing materials. That points right at the valuation issues behind that performance.

Political contributions are a hot button. If you are going to solicit state or local pension funds, you need to limit political contributions to certain candidates and the political parties in that state. There are also state and local lobbying rules that could apply. See California for example that makes certain internal people fall into the statutory definition of lobbyist.

Summary, all marketing materials should be approved by compliance before being set free into the wild.

The panel expressed some concern that the JOBS Act changes may not be as simple as deletion of the ban on solicitation and advertising.

When using benchmarks, it’s important to use appropriate benchmarks. You can’t be misleading. It needs to be an apple to apple comparison.

You need to be cautious when communicating with investors during a fundraising period. If it could be used to entice the limited partner to invest in the next fund, it could be considered advertising and subject to the marketing limits.

Insider Trading and Restricted Lists

These are my notes from the “Insider trading and restricted lists” session at the Private Fund Compliance Forum 2012.

Two items affect insider trading: federal securities law (10b5) and a firm’s code of ethics under the Investment Advisers Act.

The panelists do not circulate a restricted list. The SEC will ask for the restricted list and ask employees if they know where the restricted list.

Given your firm’s profile, you can tailor the restrictions to the profile. The SEC does not have specific limitations.

It is important to use the insider trading list to explain why companies end up on the restricted list.

It’s also important to get companies back off the restricted list. If you signed a Non-Disclosure Agreement you need to at least respect the term of the NDA. If you lose the auction, then wait for the deal to be announced. Review the list on a regular basis to make sure it stays up to date.

What about extending the code beyond employees? Most of the panelists extend the restrictions to any relative living in the household.

If you are using paper statements, mark on the statement that you reviewed the statement. Date and initial works. Also put a check mark next to the trades shown on the statement indicating your review.

The panel also spent a fair amount of time discussing expert networks. Paying any individual for information could make them an expert network. Keep in mind that the new STOCK Act that prohibits Congressional trading also creates a duty of confidentiality when it comes to Congressional actions and makes more legislative information gathering subject to insider trading limitations.

Policies need to be reasonable designed to prevent violations of the federal securities laws.

At a minimum you need to do what you say you will do, even if that may not be enough. Document decisions and discussions about trading decisions.

Conducting an Effective Annual Review

These are my notes from the “Conducting an effective annual review” session at the Private Fund Compliance Forum 2012.

Moderator:
Charles Lerner, Editor, The US Private Equity Fund Compliance Guide and The US Private Equity Fund Compliance Companion & Principal, Fiduciary Compliance Associates LLC
Panel Members
Nicholas Denton-Clark, Managing Director & Chief Compliance Officer, PineBridge Investments LLC
Kelly S. Hale, Compliance Officer, TA Associates
Danielle M. Perfetuo, Chief Compliance Officer & Counsel, Alcion Ventures
Robert E. Phay, Jr., Associate General Counsel & CCO, Commonfund

You are required to update the policies and procedures every year. That means date them.

One topic was whether to run the annual review throughout the year or all at once. Panelists came down on each side.

One panelist looked that the litigation releases to see what went wrong with other firms. That adds a perspective on whether the firm’s policies and procedures could address and prevent the problem. It’s a also a great tool to help educate business people on compliance problems.

Top Ten things to consider when conducting an annual review

  1. Utilize your risk assessment to determine focus areas
  2. Review new products or business lines and current market conditions
  3. Review results and issues raised in previous review
  4. Review top SEC deficiency and focus areas
  5. Ensure new rules, regulations and guidance are addressed in your policies and procedures
  6. Confirm conflicts of interests are addressed and/or mitigated
  7. Interview employees to assess program effectiveness
  8. Review your disclosure documents and other regulatory filings
  9. Test the effectiveness of and compliance with your policies
  10. Document your review

For new registrants, Charles recommended that you do the annual review in the fall. If it’s a bust, then don’t document the review. Then do another in early 2013, within a year of registration, hopefully with the problems fixed from the busted annual review.

The SEC does not require a written report, but it needs to be a written report. How else can you prove that you did the annual review unless there was a written report. They key is to show that you were thoughtful about the process.

What goes into the report? List everything that you looked at, what problems were discovered or changes that could impact the item, proposed changes, and follow up.

What do you do if the policy is not being followed? Depends on the rule. If it follows the SEC required minimum then you need more training. Otherwise, adjust the policy so there are fewer transgressions. For example, if your policy requires pre-clearance of political contributions and people are not pre-clearing. Maybe you remove the requirement of pre-clearance.

Allocation of expenses is a hot button for the SEC when it comes to private equity. That includes calculation of the fee.

What happens if a limited partner asks for a copy of the annual review? Don’t give it to them. If the LP is a public pension fund, that document would be subject to a FOIA request.

Most of the panelists used outside counsel as an intermediary for annual review and some forensic testing. That makes the attorney-client privilege as a defense to producing the report. If the SEC asks, it’s probably still a good idea to give it to them.

It’s a good idea to keep individual names out of the annual review so that the names don’t end up in a SEC deficiency letter.