Private equity and hedge fund managers have failed to keep customers' interests in focus, resulting in higher costs to some investors, according to a private funds report issued Tuesday by the SEC.
The risk alert, titled "Observations from Examinations of Investment Advisers Managing Private Funds," covers three general areas of deficiencies identified during exams of private equity or hedge funds by the Office of Compliance Inspections and Examinations: conflicts of interest, fees and expenses, and policies and procedures related to insider trading.
"OCIE examines hundreds of private fund advisers each year and is frequently asked about its observations from these examinations as well as common deficiencies and compliance issues," the risk alert said. "Many of the deficiencies discussed ... may have caused investors in private funds to pay more in fees and expenses than they should have or resulted in investors not being informed of relevant conflicts of interest concerning the private fund adviser and the fund."
The point of the alert is to help private fund advisers review and enhance their compliance programs, and to provide investors information about the deficiencies. More than 36% of investment advisers registered with the Securities and Exchange Commission manage private funds, "which frequently have significant investments from pensions, charities, endowments and families," OCIE said.
Chris Hayes, senior policy counsel with the Institutional Limited Partners Association, whose 520 member institutions represent $2 trillion in private equity assets, said ILPA members appreciate having a specialized private funds exams unit at the SEC to make sure partnership agreements follow proper fiduciary guidelines. The risk alert "shows that there continues to be serious conflicts of interest in private funds and the SEC needs to do more," Mr. Hayes said in an interview. He is hopeful that the findings will influence the SEC's upcoming rule on private fund advertising.
In a 2020 ILPA survey, 71% of members reported that fiduciary duties were either contractually modified or eliminated altogether in at least 50% of their respective funds.
