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Home / Articles / Pooled Investment Vehicles Need to Heed Lifeguard’s Whistle

Pooled Investment Vehicles Need to Heed Lifeguard’s Whistle

June 20, 2016


The markets for private capital are evolving and growing.  By one estimate, there are three dollars raised in the private capital markets for every dollar raised in the public markets.  This has led to an explosion in new funds and pooled investment vehicles, from the giant private equity groups to much smaller boutique private hedge funds.  Many of these are run by investment advisors who take an active role in the management of their clients’ capital.  Generally, this activity requires that the investment advisor register with the SEC and become subject to the corresponding securities rules and regulations.  And an unsuspecting advisor can wander into this realm, and face new reporting and compliance requirements.

On the Agenda

When an investor entrusts an advisor with discretionary control over the investor’s capital, the SEC wants to know that some level of appropriate outside oversight is in place.  One of the ways the SEC tries to ensure this is by conducting more examinations of “Never-Before-Examined” investment advisors and investment companies.  These examinations have been added to the SEC’s published “Examination Priorities for 2016.”

Never-examined investment advisors will most likely need to become Registered Investment Advisors (RIAs), and comply with the “Custody Rule.” Anyone with access to another person’s assets must follow the guidelines of the Custody Rule.

Why Is This Occurring?

The increased scrutiny and regulation is due to the infamous Madoff Ponzi Scheme of 2009. The SEC implemented new rules and regulations during 2010 because of this, but some less sophisticated or unknowingly non-compliant investment professionals have struggled to not only understand the new rules and regulations but also keep current with them.

What Does This Mean?

In a typical structure, an investment advisor may have an affiliate that is a general partner or managing member (GP) in an investment fund.  Regardless of the GP’s level of investment, this will generally make the advisor subject to the Custody Rule. To help safeguard the assets the advisor has discretion over, surprise examinations or financial statement audits of the investment funds are required.  If an advisor has had this arrangement in place and has not had the required examinations or audits performed, post-facto audits may need to be conducted for not only the current year but also the previously unaudited years.

Getting Registered and Getting Compliant

An increasing number of private hedge funds, family office funds, “investment clubs,” fundless sponsors and the like are being formed, and advisors acting as investment professionals may unwittingly believe they are exempt from the RIA rules due to the closed nature of their investor base.  Managers of such pools of private capital should seek the counsel of a securities attorney and a qualified CPA to determine whether these rules apply to them, including having their Form ADV reviewed for accuracy before the annual filing requirement.

Pair with qualified CPAs

Clark Schaefer Hackett’s team of CPAs is registered with the Public Company Accounting Oversight Board (PCAOB), and our professionals have substantial experience advising Registered Investment Advisors. We understand the SEC regulations and compliance requirements and can help ensure your firm stays compliant.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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