The Office of Compliance Inspections and Examinations has just released a Risk Alert (link below) related to recent SEC inspections of private equity and hedge funds. The list of issues the SEC has found is extensive - and some areas, notably the potential in private equity for conflicts around investment allocations, cross investments / transfers of assets between funds, and the potential for conflicts around PE co-investments, have been areas of concern for Castle Hall for some time.
The SEC continues to be focused on adequate disclosure. Conflicts clearly do exist in complex transactions: if the first rule of due diligence is "not to be surprised", then sufficient, timely disclosure can at least inform investors of actual or potential conflicts. However, the SEC does also consider scenarios where investors can suffer direct financial loss, especially around fees and expenses.
We have presented a summary of the key issues noted by the SEC below - which creates a helpful due diligence checklist.
The full SEC Risk Report is available here.
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