The staff of the National Examination Program in the SEC’s Office of Compliance Inspections and Examinations (OCIE) made publicly available a letter discussing a new examination initiative regarding newly registered private fund advisers (advisers to private funds that registered after the effectiveness of SEC rulemaking regarding adviser registration matters pursuant to the Dodd-Frank Act). The two-year initiative involves outreach to newly registered advisers, focused risk-based examinations of certain newly registered private fund advisers (referred to as “Presence Exams”) and following the conclusion of the Presence Exams, reports to the SEC and the public on the initiative.
The letter states that examination staff conducting a Presence Exam will review one or more of the following areas:
- Marketing. OCIE staff will review marketing materials and how private fund investors are solicited, including the use of placement agents.
- Portfolio Management. OCIE staff will review portfolio decision-making practices, including the allocation of investment opportunities and whether those practices are consistent with disclosures to investors.
- Conflicts of Interest. OCIE staff will review the procedures and controls used to identify, mitigate, and manage conflicts of interest, including (a) allocation of investments, fees and expenses; (b) sources of revenue; (c) payments by private funds to advisers and related persons; (d) outside business activities and personal securities trading of adviser personnel; and (e) transactions by advisers with affiliated parties.
- Safety of Client Assets. OCIE staff will review compliance with provisions of the Investment Advisers Act regarding the safekeeping of client assets including the custody rule, which may involve the review of independent audits of private funds.
- Valuation. OCIE staff will review valuation policies and procedures, including those for fair valuing illiquid or difficult to value instruments.