SEC Sees Private Funds’ Marketing Activities Creating Risks

One of the many changes created by the Dodd-Frank financial reform law was new registration and reporting requirements imposed on private fund advisers.

The new rules aimed to give investors greater visibility into these funds to make evaluating them easier. The requirements gave regulators a way to identify firm‑specific risks, and risks these types of funds pose to the broader asset management industry and the financial system as a whole.

Increased Visibility

Last week, the Securities and Exchange Commission released its first set of statistics on the nearly 2,700 private fund advisers included in this group. The aggregated data covered the period from Q1 2013 through Q4 2014, and included hedge funds and private equity funds with $150 million or more in assets.

This first look behind the curtain revealed several risks and potential problems in the private fund world.

Compliance Problems and Risks

As reported in The Wall Street Journal, SEC Chair Mary Jo White discussed these new statistics in a speech she delivered at a hedge fund industry conference in New York on October 16th. In her comments, she focused on advisers’ fiduciary duty, which she described as “the cornerstone of our regulatory framework for asset managers,” and the “the bulwark of investor protection.” She also noted that in looking at hedge funds and private equity funds, “…our examiners identified several areas where cracks in this bulwark were found.”

One of the problematic areas the SEC Chair identified was private funds’ marketing activities. Compliance issues found by examiners included marketing materials containing manipulated investment performance data and benchmark comparisons that lacked appropriate context. Examiners also found marketing materials that did not include the necessary compliance notices and disclosure statements.

Avoiding Trouble Ahead

When top regulators release data that reveal areas of compliance risk and problematic business practices, and discuss the issues in major speeches at industry conferences, stepped up enforcement is sure to follow. That’s why hedge funds and private equity firms should take a hard look at their practices in these areas, and take steps now to remedy potential problems.

With regard to their marketing activities, firms can readily address the types of functional problems highlighted in the SEC Chair’s speech. With a content automation system, it’s easy for firms to button up and lock down their production of marketing materials in an automated, reliable, scalable, and well-documented process. And firms can procure and implement one of these systems for a fraction of the cost of an SEC enforcement action.

Smart firms will make the necessary moves now to nip these problems in the bud rather than taking their chances with regulators.


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