The SEC issued a Risk Alert identifying expense misallocation as one of the most widespread compliance problems facing private equity and hedge fund managers. The SEC’s objective in issuing the Risk Alert was “to encourage advisors to assess their [practices] to ensure they are complying with the Advisors Act, the relevant rules, and their fiduciary duty.”
The Risk Alert was based on an analysis of compliance issues discovered in over 1,500 advisor exams completed during the past two years. The agency found advisers frequently misallocated expenses to their funds “in contravention of the applicable advisory agreements, operating agreements, or other disclosures.”
The SEC continued:
Advisers should review their practices, policies, and procedures to ensure compliance with their advisory agreements and representations to clients in light of the fee and expense issues noted in this Risk Alert.
The SEC began warning private advisors about expense allocation in 2012 and has backed up its warnings with 11 public misallocation charges averaging penalties of $3.7 million. April’s Risk Alert is the second official warning from the agency on expense allocation this year. The first warning came in February when the SEC included expense allocation in its list of exam priorities for 2018.
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