SEC: PF exams to focus on portfolio risk

Study guide promises closer looks at marketing rule, valuations

American regulators will probe registered private fund managers on how well they’re complying with the SEC’s marketing rules, how fairly they’re disclosing their valuation methodologies and how they’re managing portfolio risks, commission examiners say.

Marketing rule exams will focus on whether fund advisers, “including advisers to private funds,” have “adopted and implemented reasonably designed written policies,” whether they’ve “appropriately disclosed their marketing-related information on Form ADV” and whether they’ve “maintained substantiation of their processes and other required books and records,” regulators say in their fiscal 2024 exam priorities, released Monday.

On valuations, regulators say they’re focused especially on how registered investment advisers handle “illiquid or difficult-to-value assets, such as commercial real-estate or private placements,” how well they’re protecting “clients’ material, non-public information,” the “accuracy and completeness” of their regulatory disclosures, as well as firms’ policies for vetting and hiring “third-party and affiliated service providers,” and whether managers are “obtaining informed consent from clients when advisers implement material changes to their advisory agreements.”

“Such reviews will assess, among other things, whether the advisers’ policies and procedures are reasonably designed and implemented and whether the procedures prevent the advisers from placing their interests ahead of clients’ interests,” examiners say. “As with previous years, the division continues to prioritize examinations of advisers that have never been examined, including recently registered advisers, and those that have not been examined for a number of years.”

‘More transparency’

The SEC has been publishing its exam priorities for more than a decade. They’re supposed to be a kind of study guide ahead of a firm’s final exam. Monday’s priorities are the earliest they’ve been released. Regulators say they wanted to release their priorities with the start of the fiscal year “to provide more transparency and to continue to move forward together with investors and the industry to promote compliance.”

Under SEC Chairman Gary Gensler, private funds have gotten the closest looks yet from regulatory microscopes. There are now more than 5,500 registered private fund managers on the SEC’s rolls, and regulators estimate the industry accounts for north of $25 trillion in gross assets.

Regulators say they’ll use fiscal 2024’s private fund exams as a chance to get closer looks at:

  • “The portfolio management risks 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.”
  • How well funds are adhering “to contractual requirements regarding limited partnership advisory committees or similar structures (e.g., advisory boards), including adhering to any contractual notification and consent processes.”
  • The “accurate calculation and allocation of private fund fees and expenses,” 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 the SEC’s custody rule, “including accurate Form ADV reporting, timely completion of private fund audits by … and the distribution of private fund audited financial statements” and
  • Policies for the newly expanded Form PF requirements.