HRL Compliance Newsletter

By July 6, 2020Uncategorized

Private Fund Risk Alert / Form CRS Reminders and New FAQs / ESG

The regulators were busy in late June 2020. In this newsletter, we cover the SEC’s recent Risk Alert, Form CRS reminders and new FAQs, as well as the Department of Labor’s proposed ESG rule.


Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds

On June 23, 2020, the U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert highlighting certain compliance issues the Staff has observed in examinations of registered investment advisers that manage private equity funds or hedge funds (collectively, “private fund advisers”). Though the Risk Alert speaks to private fund advisers, ALL investment advisers should heed the guidance, as it covers a range of business practices relevant to the broader adviser industry.

The Risk Alert is intended to assist private fund advisers in reviewing and enhancing their compliance programs, and to provide investors with information concerning private fund adviser weaknesses. Deficiencies fall into three categories as detailed in the Risk Alert: conflicts of interest; fees and expenses; and handling of material nonpublic information and Codes of Ethics. Each of these areas have proven challenging to private fund advisers and the topic of deficiency letters as well as enforcement actions.

The Risk Alert cautions advisers relative to:

  • Favoritism:
    • Allocation of investment opportunities
    • Conveyance of special liquidity rights
  • Misrepresentation:
    • Co-investments
    • Allocation of investment opportunities
  • Inadequate disclosures:
    • Multiple clients investing in same company
    • Financial relationships with clients or investors
    • Adviser interests in recommended investments
    • Service provider arrangements
    • Fund restructurings
    • Cross transactions
    • Fee and expense allocations
    • Use of operating partners
    • Acceleration of monitoring fees
  • Policy and procedure failures:
    • Lack of policies and procedures to manage conflicts of interest
    • Failure to follow policies and procedures in a manner that disadvantaged investors or led to insider trading
    • Valuation practices
    • Handling of material nonpublic information
    • Failure to correctly identify certain individuals as “access persons”
  • Failure to honor fund document limitations

View the Risk Alert here:


Form CRS – Client Reminders and New FAQs

Client Reminders: now that you have filed Form CRS with the SEC, remember to do the following:

  • Post Form CRS on your public website and make sure all links are working
  • Deliver Form CRS to new clients before they execute the advisory agreement
  • Deliver Form CRS to existing clients initially on or before July 30, 2020
  • Deliver Form CRS to existing clients thereafter when you:
    • open a new account that is different from the retail investor’s existing account(s);
    • recommend that the retail investor roll over assets from a retirement account into a new or existing account or investment; or
    • recommend or provide a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account, for example, the first-time purchase of a direct-sold mutual fund or insurance product that is a security through a “check and application” process, i.e., not held directly within an account.

New Form CRS FAQs:  on June 26, 2020, the Staff added additional information to Form CRS FAQs to clarify delivery requirements, permissibility of modifying Form CRS wording, wrap programs, prospective customers, and record keeping. The Staff reminded advisers and brokers that Form CRS is designed to serve as a disclosure document, not marketing material.

View Form CRS FAQs here:


ESG Investing under ERISA

ESG (environmental, social, and governance) has been a popular investment mandate for many investors including pension funds. Many believe it is appropriate to balance greater social goods and needs with investment needs and performance. On June 23, 2020, the U.S. Department of Labor (the “DOL”) issued a proposed rule that would amend its “investment duties” regulation set forth at 29 C.F.R. § 2550.404a-1.  The DOL states that the proposed rule is intended to “eliminate confusion” and limit when and how ERISA plan fiduciaries may:

  • consider non-pecuniary factors, such as ESG factors (also referred to as “socially responsible investments” or “economically targeted investments”), when making plan investment decisions for a defined benefit plan, or
  • offer an ESG-themed investment option under an individual account defined contribution plan (e.g., a 401(k) plan).

The DOL proposal reminds pension fund managers and plan providers that in light of their fiduciary duties it may be illegal under ERISA to sacrifice performance or assume additional risk through ESG investments. In its news release announcing the proposal, the DOL noted the confusion that persists for ERISA plan fiduciaries with regard to its ESG-investing rules, which the DOL acknowledged may be a result of varied statements it has made over the years in past guidance.  In short, the proposed rule would codify the DOL’s view that the sole focus of ERISA plan fiduciaries must be the financial returns and risk to participants and beneficiaries.  ERISA plan fiduciaries must not sacrifice investment returns, take on additional investment risk, or pay higher fees to promote non-pecuniary benefits or goals.

The DOL invited comments from the public on all facets of the proposal (which are due by July 30, 2020).  If finalized, these rules would become effective 60 days after publication of the final rule. To view the DOL’s news release outlining its proposed ESG rule, follow this link:

Betsy Rathz

Author Betsy Rathz

More posts by Betsy Rathz