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GPs cautioned to review performance reporting

Proposed amendments to the Adviser’s Act, which lawyers warn is off some managers’ radar, eliminate a longtime loophole when distributing performance reports.

In May, the US Securities and Exchange Commission (SEC) captured the industry’s attention when it issued new amendments to Form ADV reporting as part of efforts to provide regulators and investors with more information on registered investment advisers.

In the time since, legal advisors have noticed that accompanying updates to the Advisers Act have not grabbed the industry’s attention in the same way as the Form ADV proposals, and are warning clients to review the way they calculate and distribute performance information. 

“I have clients who are aware that the Form ADV proposals could mean more reporting work, but some seem surprised to learn about the Advisers Act changes, which require an equal amount of review in light of the proposals,” one industry lawyer told Private Equity International's sister publication pfm.

Currently, registered advisers are only required to maintain supporting documentation for performance claims contained in communication distributed to 10 or more people.

“What [examiners] have found in a few recent investigations and enforcement actions is that some advisers are disseminating one-on-one information to select clients, but not keeping proper backup,” noted Michael Suppappola, a partner in Proskauer’s private investment funds practice. “When examiners asked for information to substantiate the claims, the advisers were able to point to the rule and escape on a technicality.”

This practice was not typical, however, and the change is primarily designed to curb the actions of a few bad actors.

“It wasn’t market practice to make a distinction between what records you kept when communicating performance with one or 10 people,” said Jack Rader, senior principal consultant at ACA Compliance Group. “It’s really just a harmonization between what was expected previously and what’s done currently.”

The proposals stress the need to ensure that all communications made by the GP are captured on the adviser’s recordkeeping system “and that any e-mails or other communications by employees that use performance information have appropriate books and records back-up,” a Debevoise & Plimpton client alert cautioned.