SEC 2024 Exam Priorities for Private Fund Advisers
SEC registered investment advisers will face the biggest changes
The Division of Examinations released its 2024 examination priorities to inform investors and registrants of the key risks, examination topics, and priorities that the Division plans to focus on in the upcoming year.
“The Division remains focused on advisers’ compliance programs, including whether their policies and procedures reflect the various aspects of the advisers’ business, compensation structure, services, client base, and operations, and address applicable current market risks.”
Particular examination focus for all investment advisers will include:
Marketing practice assessments for whether advisers, including advisers to private funds, have:
- adopted and implemented reasonably designed written policies and procedures to prevent violations of the Advisers Act and the rules thereunder including reforms to the Marketing Rule
- appropriately disclosed their marketing related information on Form ADV
- maintained substantiation of their processes and other required books and records.
Marketing practice reviews will also assess whether disseminated advertisements include any untrue statements of a material fact, are materially misleading, or are otherwise deceptive and, as applicable, comply with the requirements for performance (including hypothetical and predecessor performance), third-party ratings, and testimonials and endorsements.
Examinations of investment advisers to private funds
The Division will continue to focus on advisers to private funds and prioritize specific topics, such as:
- The portfolio management risks that are present when there is exposure to recent market volatility and higher interest rates. This may include private funds experiencing poor performance, significant withdrawals and valuation issues and private funds with more leverage and illiquid assets.
- Adherence to contractual requirements regarding limited partnership advisory committees or similar structures (e.g. advisory boards), including adhering to any contractual notification and consent processes.
- Accurate calculation and allocation of private fund fees and expenses (both fund-level and investment-level), including valuation of illiquid assets, calculation of post commitment period management fees, adequacy of disclosures, and potential offsetting of such fees and expenses.
- Due diligence practices for consistency with policies, procedures, and disclosures, particularly with respect to private equity and venture capital fund assessments of prospective portfolio companies.
- Conflicts, controls, and disclosures regarding private funds managed side-by-side with registered investment companies and use of affiliated service providers.
- Compliance with Advisers Act requirements regarding custody, including accurate Form ADV reporting, timely completion of private fund audits by a qualified auditor and the distribution of private fund audited financial statements.
- Policies and procedures for reporting on Form PF, including upon the occurrence of certain reporting events.
Other considerations for private fund advisers
Earlier in 2023, the SEC voted to adopt final amendments to the Investment Advisers Act of 1940 that subject private fund advisers to a number of new requirements.
The Rules also include an amendment to existing Rule 206(4)-7 under the Advisers Act that will require all registered investment advisers to document the results of their required annual compliance reviews in writing.
The final Private Fund Adviser Rules are divided into six distinct parts:
- Written Annual Compliance Review
- Quarterly Statement Rule
- Mandatory Annual Audit
- Adviser-led Secondaries Rule
- Restricted Activities Rule
- Preferential Treatment Rule.
Effective and compliance dates
The new Private Fund Adviser Rules will take effect 60 days after publication in the Federal Register (Effective Date) which was 14 September 2023, however, the SEC’s interpretations regarding how an adviser’s fiduciary duty applies to its private fund clients (as discussed in the Restricted Activities Rule section above) are effective immediately.
Compliance with the amendments to the Compliance Rule is required on the Effective Date – 13 November 2023.
Compliance with the (1.) Restricted Activities Rule, (2.) Preferential Treatment Rule and (3.) Adviser-Led Secondaries Rule will be required within 12 months of the Effective Date for advisers with $1.5 billion or more in private fund assets under management (14 September 2024) and within 18 months of the Effective Date for advisers with less than $1.5 billion in private fund assets under management (14 March 2025).
Compliance with the (4.) Quarterly Statement Rule and (5.) Audit Rule will be required within 18 months after the Effective Date (14 March 2025).
How can Waystone Compliance Solutions help?
Our US compliance professionals are experts at managing SEC regulatory compliance programs and are uniquely qualified to understand your business and its regulatory challenges.
If you have any questions about the SEC’s Exam Priorities for 2024 and how these may affect your business, please reach out to your usual Waystone Compliance Solutions representative or contact us below.