An important consequence of a manager registering with the SEC is that it becomes subject to the SEC examination process. SEC examinations are conducted to ensure that registered managers comply with the various federal rules and regulations that govern their business. The SEC has ramped up the resources and expertise it’s dedicated to this activity in recent years.
SEC-led examinations of registered managers can be very thorough. They often uncover “deficient” areas related to a manager or its operations that may be difficult for investors to discern given the limited amount of manager-related information that investors may have access to.
The problem areas identified by the SEC are usually addressed in correspondence between the SEC staff and a manager for follow-up action. The process is confidential but that does not preclude a manager from voluntarily sharing the results of any SEC examination with its investors.
The issues identified by an SEC exam can be relatively innocuous or more serious. However, since beauty is often in the eye of the beholder, an issue that one investor may consider innocuous, another may consider more serious. That’s an important judgment call for each investor to make. Inquiries by an investor to a manager on the results of any SEC examination done prior to a private fund investment, and, on an ongoing basis once an investment is made, is an important investor due diligence tool.