Covid-19 risk alert: Communicate (and document)

The pandemic has millions working from home but it's no time to get 'complacent' with compliance, experts say in the wake of an SEC alert.

The SEC’s recent risk alert on covid-19 challenges private fund advisors to come up with “creative” solutions to a new, and world-historic, phenomenon, experts told sister title Regulatory Compliance Watch.

“This is not a time to be passive with compliance,” said David Tang, leader of SKRC, a compliance consulting service owned by Seward & Kissel. “A major theme of the risk alert is teleworking, from being unable to pick up and process checks in the mail to the challenges of remotely supervising personnel and conducting investment due diligence. Firms have certainly come up with creative solutions.”

As ever, Tang said, the key here is to document whatever you do, and carefully: “The next step is to confirm that your policies and procedures have caught up with your new practices.”

‘Ripe for abuse’

The eight-page risk alert, issued August 12, is addressed to investment advisors and broker-dealers alike but it struck similar chords as an earlier risk alert on private funds, said Genna Garver, a partner in law firm Troutman Pepper’s New York office.

“The fact that fees made both lists really speaks for itself,” Garver told RCW. “The category in general is ripe for abuse, but particularly in times of financial stress. For private fund managers, their position as fiduciaries with authority to allocate certain fees and expenses heightens the potential for willful misconduct but also for inadvertent miscommunications in general.”

Garver sees the covid-19 risk alert as “an opportunity” – and a “juicy one” at that – for private fund advisors to undertake special reviews, and document them, to show regulators funds “are taking them seriously.”

Communication essential

Tang and Garver said that open, effective – and frequent – communication with investors and staff is more important now than ever.

“It will reflect well on your firm to see that the CCO has provided additional compliance alerts, reminders, and training in the current environment,” Tang said. “For example, the risk alert offers six key areas to train and re-train personnel on.”

Garver said it’s essential to make sure “everybody’s on the same page” on asset allocations, valuation methodologies and management fee calculations.

Editor’s note: Troutman, Withum, PEF Services and sister title Private Equity International are working on a biennial survey of private fund fees and expenses. It’s due for publication in November.

Got a tip on private fund compliance? Contact Bill Myers.