Is This an Inspection or an Investigation? The Blurring Line Between Examinations of and Enforcement Actions Against Private Fund Managers

The most significant impact of SEC registration on a private fund adviser is that the adviser becomes subject to inspection by the SEC’s Office of Compliance Inspections and Examinations. The greatest risk arising from an examination is that the inspection staff decides to refer a finding from an inspection to the Division of Enforcement (Enforcement) for an investigation. Despite the severe collateral consequences that can befall a fund manager simply from the initiation of an investigation, divining whether the staff is contemplating an Enforcement referral is a surprisingly elusive proposition. In this guest article, Mark K. Schonfeld and Kenneth J. Burke, partner and then-associate, respectively, at Gibson Dunn & Crutcher, discuss the increasing risks of SEC examinations becoming enforcement investigations and practical strategies for fund managers to anticipate and mitigate those risks. See also our two-part series on “Steps Advisers Can Take to Minimize the Risk That a Routine SEC Examination Ends With a Referral to Enforcement”: Five Key Priorities for OCIE (Jan. 4, 2018); and Examination Process, Interview Preparation and Remediation Considerations (Jan. 18, 2018).

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