Are Hedge Fund Managers Required to Disclose the Existence or Outcome of Regulatory Examinations to Current or Potential Investors?

Perhaps the most onerous obligation for any SEC-registered investment adviser is the duty to prepare for, manage and survive SEC examinations. Newly registered private fund advisers in particular must think about (1) examination preparedness; and (2) examination management and survival. This article seeks to assist advisers in designing an investor disclosure strategy concerning regulatory examinations. In doing so, it discusses the three types of SEC examinations and circumstances under which advisers may, or may not, be required to disclose the existence or outcome of those examinations; the five primary sources of a fund manager’s potential obligations to disclose the existence or outcome of an examination; how advisers can reconcile the privileged information rights often granted to large investors in side letters with their fiduciary duty to make uniform disclosure to all investors; and whether fund managers must disclose deficiency letters to current or prospective investors, along with how such disclosures should be made. See our three-part series on steps an exempt reporting adviser must take to transition to SEC-registered investment adviser status: “Registration Triggers and Building a Compliance Department” (Oct. 5, 2017); “Adopting Compliance Policies and Procedures” (Oct. 12, 2017); and “Regulatory Filings, Updates to Fund Documents and Preparation for SEC Examination” (Oct. 19, 2017).

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