With general solicitation and general advertising on the horizon, private fund advisers should review their policies and procedures to determine whether they are reasonably designed to prevent the use of fraudulent or misleading advertisements, said Norm Champ, the Director of the SEC’s Division of Investment Management, in remarks today before the Practicing Law Institute in New York.  This review is especially important, he said, if the funds intend to engage in general solicitation.  Hedge fund sponsors should also confirm that their practices for verifying accredited investor status meet the new requirements that apply to Rule 506(c) offerings.

In anticipation of the new rules, the SEC created an inter-Divisional group to review the new market for Rule 506 offerings, and the practices that will evolve from the new rules.  Among other things, he said, the staff will focus on accredited investor verification practices, and develop risk characteristics regarding the types of issuers and market participants that use general solicitation.

Not surprisingly, Champ said that the staff will also focus on performance claims by private funds making Rule 506(c) offerings.

Champ said that the Financial Stability Oversight Council, or FSOC, will use information collected from Form PF to assess systemic risk, and that the SEC will use the information to support its own regulatory programs, examinations and investigations.  He emphasized that the information the SEC collects will remain confidential.

Champ said that the Office of Compliance Inspections and Examinations, or OCIE, has established an “outreach” program for newly registered advisers to private funds that will focus on five key areas of risk:

  • Marketing
  • Portfolio management
  • Conflicts of interest
  • Safety of client assets
  • Valuation

Champ also reminded advisers that insider trading continues to be a major area of focus for the Commission’s enforcement staff, and that advisers should review their compliance policies and procedures to ensure that can adequately detect and prevent insider trading.

While Champ’s remarks provided no ground-breaking news, they are a helpful reminder to advisers that the SEC will be watching carefully Rule 506(c) offerings.  Now is the opportune time for advisers to review those policies and procedures and whip them into shape before the next regulatory examination.