The SEC’s Dynamic Regulation - Private Funds

Although the U.S. SEC has not yet published its priorities for 2022, it has provided hints as to what its focus will be in the coming year, based on enforcement actions, recent speeches by the commissioners and published risk alerts. One such focus appears to be private funds advisers as evidenced by the first SEC alert of 2022 which is solely focused on this market.

The SEC has acknowledged the significant growth in the size and number of private equity and venture capital funds and new strategies, structures and business practices. In response to this market growth, the SEC also noted that among other things, it was focused on fund disclosures and enhanced private fund reporting. The risk alert published by the SEC’s Division of Examination (DOE) last week is consistent with this theme and highlighted common deficiencies where Advisers failed to act consistently with fund disclosures or included misleading disclosures related to performance and marketing. Unlike in the DOE’s examination observations of Advisers published in June 2020, this recent alert also highlighted failures that occurred in the light of the pandemic, including Advisers not following liquidation and fund extension provisions or not updating key person provisions that had become inaccurate. Additionally, the SEC recently proposed amendments to Form PF that will require certain Advisers to report additional information about its managed funds to assist the SEC with its regulatory oversight.

In addition, there were several SEC enforcement actions taken against Advisers during the past year. The charges in these enforcement actions included how Advisers handle material non-public information, insider trading, special purpose acquisition companies (SPACs), use of alternative data, and books and records obligations. Not surprising, the violations in these actions were consistent with the SEC’s examination priorities for 2021. Further, looking back at 2021, there are a few regulatory developments, including Form CRS, the new marketing rule and transaction reporting, that will impact private fund advisers (“Advisers”) going forward.

While Advisers may find themselves being scrutinized by the SEC, they have been given a road map to help them effectively comply with the rules and regulations under which they operate. It is important that Advisers take the opportunity to review their policies and procedures and assess if and how they are complying with the Advisers Act. Advisers should also review the deficiencies observed in the risk alerts and findings in the SEC enforcement actions against their own compliance program to identify and rectify any gaps they may have.