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What are you missing in your management of Private Funds?

What Are You Missing In Your Management Of Private Funds? | Atlanta, GA

The OCIE is frequently asked about their findings in the examination process of RIAs that manage private equity funds or hedge funds. These deficiencies they discover may have caused investors to pay higher fees and expenses or caused them not to be informed of conflicts of interest concerning the adviser and fund.

Here are some of the Conflicts of Interest found:

Conflicts related to allocations of investments

Advisors did not provide adequate disclosure around conflicts related to allocations of investments among clients.OCIE found private fund advisers that preferentially allocated limited investment opportunities to new clients, higher fee-paying clients, or proprietary accounts or proprietary-controlled clients, thereby depriving certain investors of limited investment opportunities without adequate disclosure.They also found fund advisers that allocated securities at different prices or in obvious inequitable amounts among clients without adequate disclosure of the process or inconsistent to the process disclosure to clients.

Conflicts related to multiple clients investing in the same portfolio company

The staff observed private fund advisers that did not provide adequate disclosure about conflicts, causing clients to invest at different levels of a capital structure. For instance, one client owning debt and another client owning equity in a single portfolio company, which keeps investors from important information related to conflicts associated with their investments.

Conflicts related to financial relationships between investors or clients and the adviser

The private fund advisers that did not provide disclose relationships between themselves and clients. Other situations included select investors with economic interests in adviser. Without proper disclosure other investors didn’t have important information around conflicts associated with their investments.

Conflicts related to preferential liquidity rights

Private funds advisors entered into special agreements with select investors agreeing to special terms without proper disclosure, leaving some investors unaware of potential harm if these select investors acted on the terms.

Conflicts related to private fund adviser interests in recommended investments

Private fund advisers had interests in investments recommended to clients, but did not provide adequate disclosure of such conflicts.

Conflicts related to co-investments

Inadequately disclosed conflicts were found related to investments made by co-investment vehicles and other co-investors, potentially misleading certain investors as to how these co-investments operate.

Conflicts related to service providers

Inadequately disclosed conflicts related to service providers and private fund advisers, such as portfolio companies controlled by advisers’ private fund clients or financial incentives.

Conflicts related to fund restructurings

Advisers purchasing fund interests from investors at discounts during restructurings without adequate disclosure regarding the value of the fund interests. No proper disclosure on investor options during restructurings, potentially impacting the decisions made by investors.

Conflicts related to cross-transactions

Private fund advisers didn’t properly disclose conflicts related to purchases and sales between clients, or cross-­transactions. Advisers established the price at which securities would be transferred between client accounts in a way that disadvantaged either the selling or purchasing client but without providing adequate disclosure to its clients.

Allocation of Fees and Expenses

Private fund advisers were inaccurately allocating fees and expenses. This caused overpaying of expenses by the clients. Such observations included sharing expenses on other activity, charging clients for expenses not permitted (like advisor-related expenses), and failure to comply with contractual limits (like charging legal fees).

“Operating Partners”

No proper disclosure about the role/compensation of those providing services, misleading investors about who would bear the costs associated with these operating partners’ services and potentially causing investors to overpay expenses.


Private fund advisers did not value client assets in accordance with their valuation processes or in accordance with disclosures to clients. This sometimes led to overcharging management fees and carried interest because such fees were based on inappropriately overvalued holdings.

Monitoring I board I deal fees and fee offsets

Private fund advisers had issues with receipt of fees from portfolio companies, such as monitoring fees, board fees, or deal fees. Over-payment of management fees were caused by failure to calculate offsets in accordance with disclosures.

Code of Ethics

Private fund advisers failed to establish, maintain, and enforce provisions in their code of ethics. Such instances involved failure to enforce trading restrictions on securities that had been placed on the adviser’s “restricted list”; failure to enforce requirements in their code of ethics relating to employees’ receipt of gifts and entertainment from third parties; and require access persons to submit transactions and holdings reports timely or to submit certain personal securities transactions for pre-clearance.

You might be thinking that some of these issues are present now with your funds. You are probably questioning your own Policies and Procedures, Code of Ethics, and more importantly – fund managers. Is it time for fee and expense review? Is it time to hand Compliance over to a dedicated team of legal and fund compliance experts? Schedule a consultation and find out what the next best step is for your firm.

Author Bio

Leila Shaver is the Founder of My RIA Lawyer, a law firm that provides compliance and legal consulting for financial institutions. With extensive experience as a securities attorney and compliance expert, she has served as Chief Compliance Officer and General Counsel to RIAs, BDs, and TAMPs with billions in assets under management.

Leila understands the challenges RIAs face and is committed to helping RIAs streamline their processes, mitigate risks, and ensure compliance with regulatory requirements. She received her Juris Doctor from Atlanta’s John Marshall Law School and is a West Georgia Young Lawyers’ Association member. Leila has received numerous accolades for her work, including the Carroll County Bar Association’s Outstanding Young Lawyer Award in 2017.

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