Tips for Updating Your Compliance Program: SEC Exam Observations Risk Alert


Jaqueline Hummel

Publish Date



  • Compliance

Compliance officers face the thankless task each year of reviewing their policies and procedures to determine their adequacy and effectiveness, as required by Advisers Act Rule 206(4)-7. This review entails updating the firm's compliance program to reflect changes to relevant regulations and new regulatory guidance, and confirming the program is appropriately followed by the firm.  

We’ve compiled a series of tips to help you focus on the U.S. Securities and Exchange Commission (SEC) focus areas for 2023. You can read our previous tips here:  

Tip #12  – Update your Policies and Procedures to Address Issues from the Observations from Examinations of Private Fund Advisers Risk Alert

The SEC Division of Examinations (EXAMS) continues to focus on private funds, evidenced by its January 27, 2022 risk alert outlining common deficiencies observed during private fund exams. This alert follows the SEC's June 2020 Risk Alert, which served as a refresher focused on a different host of common deficiencies related to (1) undisclosed conflicts regarding allocation, co-investments, and liquidity rights, (2) fee issues including expense allocations, valuation, deal fees, and operating partners, and (3) material non-public information (MNPI) and Code of Ethics issues. Although this alert does not share best practices, private fund managers should take a fresh look at their compliance programs to avoid the deficiencies identified.

Our guidance

Common deficiencies noted by EXAMS are summarized below, along with our recommendations.

Observation Examples Our recommendation 

Conduct inconsistent with disclosures 

Advisers failed to follow their offering document disclosures regarding: 

  1. the role of an Advisory Board or Advisory Committee, especially concerning conflicts 
  2. liquidation and fund extension terms and “recycling” practices 
  3. management fee calculations, especially for private equity funds during the Post-Commitment period 
  4. investment strategy terms 
  5. adviser personnel changes

Firms should implement procedures required under their offering documents. If an Advisory Board vote is needed in certain instances, consider establishing a process for obtaining and documenting the vote. Periodically review and refresh offering documents to verify that actual practices are aligned. Look for ways to enhance fee calculation processes, testing, and oversight.

Inaccurate or misleading disclosures on performance and marketing

Track record: Disclosures lacked detail about benchmarks and the use of leverage. Portfolio construction processes did not correspond to disclosures, and included stale data or cherry-picked time periods 

Inaccurate calculations: Calculations based on underlying data and materials that reported projected rather than actual returns.   

Portability: EXAMS noted books & records weaknesses in ported return history. Firms also failed to adequately make the case mainly that the individual(s) were “primarily responsible” for the prior track record. 

Awards: Materials describing awards failed to disclose required elements, such as the criteria associated with the award and the amount of any fee paid by the advisor to participate or promote its receipt of the award.

Firms should consider whether their policies and procedures to review marketing materials are robust enough to catch these potential violations. Consider periodic reviews of the calculation process and interview those responsible. Review ported track records and related backups before including them in marketing materials. 

Due diligence failures relating to investments or service providers 

Advisers did not adhere to policies and procedures for conducting reasonable due diligence of fund investments (including the compliance and internal controls of the underlying investments or private funds in which they invested) or their third-party service providers (such as alt data providers and placement agents). Some advisers described their process in due diligence questionnaires (DDQs) and other materials, but failed to have adequate and corresponding policies and procedures.

Firms should consider the adequacy of their policies and procedures for investment and service provider due diligence. DDQs sometimes force firms to describe their investment research process in writing in greater detail than a firm’s compliance manual. Compliance personnel should consider incorporating language from the DDQs into existing compliance procedures.  

Use of potentially misleading "hedge clauses" 

EXAMS noted firms used offering documents with clauses that purported to waive or limit the Advisers Act fiduciary duty except for certain exceptions, such as a non-appealable judicial finding of gross negligence, willful misconduct, or fraud.

Firms should take a new look at their offering documents (and investment advisory contracts) to ensure they do not contain liability waivers that contravene an adviser’s fiduciary duties. 


How we help

We can help you to navigate the evolving regulatory landscape while considering the complexity of your firm’s unique compliance requirements. Introducing ACA Signature, a scalable solution curated to suit your firm’s unique compliance needs. ACA Signature provides financial firms with scalable consulting solutions that can be paired with innovative technology and managed services for staying on top of regulatory and daily obligations. Our team of regulatory experts can build, enhance, or manage your compliance program, helping to mitigate risks and increase operational efficiency. 

Designed by former regulators and compliance experts, ACA Signature provides services and solutions tailored to fulfill your firm’s ongoing compliance obligations. Our team includes former SEC, FINRA, FCA, NFA, CFTC, and state regulators along with former Chief Compliance Officers and senior compliance managers from prominent financial institutions in the industry. With over 20 years’ experience in the compliance industry, ACA is synonymous with quality compliance support. 

Reach out to your ACA consultant, or contact us to find out how ACA Signature can help transform your firm’s compliance program.

Watch our 2023 Regulatory Outlook webcast on demand

We recently hosted a webcast to review the regulatory changes that will likely have implications on compliance programs in 2023, and provide recommendations to prepare for these changes. Our experts discussed rule proposals and adoption, examination and enforcement trends, and regulatory guidance. Watch our webcast for more insights to help you prepare your compliance program for this year’s focus areas.

Watch now