The 2020 SEC Examination Priorities Relevant to Private Funds

Each year, the SEC's Office of Compliance Inspections and Examinations (OCIE) releases a report outlining its examination priorities for the coming year. What are the key elements of the 2020 report most applicable to private funds and registered investment advisers? What should private fund managers keep abreast of to avoid the dreaded deficiency letter? Paul Hastings partner Ira Kustin explains.


  Ira Kustin is a partner in the investment management practice at Paul Hastings. He focuses his practice on advising sponsors of, and investors in, complex hedge, private equity and credit funds and regularly counsels private fund advisers on international investment platforms including in Europe, Asia, and Latin America.

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Link to 2020 SEC Examination Priorities Report:

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The 2020 SEC Examination Priorities Relevant to Private Funds Brief Transcript

For most private fund managers, the prospect of a visit from the SEC is something that will keep you up at night. Today, in this explainer, we're going to look at the SEC's examination priorities for 2020.

I'm Ira Kustin. I'm a partner in the investment management group at Paul Hastings, and I focus my practice on the representation of private fund managers.

So, what are the examination priorities that the SEC is focused on for 2020? First, the SEC naturally continues to emphasize culture of compliance for any registered advisor. As a practical matter, this means having in place policies and procedures including a compliance manual that's not just off the shelf, but is actually customized for the advisor's actual operations, actual investments, and actual investor base. Next, the SEC continues to focus on the prevention of insider trading, and the the misuse of material, non-public information. As a practical matter for a private fund manager, this could include understanding the use of expert networks and avoiding the expert network from providing material, non-public information to the advisor that could restrict the advisor's trading activities. In addition, the SEC continues to focus on disclosure of conflicts of interest and, to the extent possible, the avoidance of conflicts. The SEC expects registered advisors to, wherever possible, minimize conflicts, and to the extent that it's impossible to minimize conflicts, to disclose in detail to investors that those conflicts exist. And the SEC also expects advisors to get some acknowledgement from investors that those conflicts have been disclosed, and that the investor understands them. The SEC continues to focus on the disclosure fees and expenses. As a practical matter, this means having disclosed in a funds offering document or governing documents in great detail any expense that may be charged to the fund as opposed to being borne by the advisor itself. During examinations in the past, the SEC has asked advisors to show the examination staff books and records relating to any fee or expense that was charged to the fund, and then reconcile that with disclosure in the fund's offering or governing documents. Registered advisors should also keep in mind that the provision of services by an affiliate of the advisor, especially when additional fees are charged by that affiliate, need to be disclosed in great detail to investors. Finally, the SEC continues to focus on information security and data privacy, especially with respect to personal information about investors.

In the SEC's 2020 report, they indicated that during 2019, the exam staff conducted roughly 3,000 inspections. About 2,000 of those resulted in deficiency letters, which is not unusual. And luckily, a far lower number resulted in a referral to the enforcement staff. Hopefully, advisors who pay attention to the SEC's examination priorities for 2020 will be able to avoid one of those deficiency letters and, even more importantly, avoid a visit from the enforcement staff.

I'm Ira Kustin, and thank you for watching TalksOnLaw.