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CRE Finance World Summer 2015


There is no way to guarantee a successful outcome to any SEC

exam, but in light of the current regulatory and examination

patterns we have observed, real estate fund managers should

preemptively revisit the following issues:

Management fee income: Review calculation methodologies and

timing critically in order to ensure that disclosures in offering

memoranda and governing documents both match Form ADV and

align with current practice. Any deviations from the manager’s

headline fee structure (such as in connection with co-investments,

separate accounts or cornerstone investors) should be disclosed

in general terms to all investors on Form ADV.

Transaction-based and other fee income: Review all fees received

by the manager (and its staff and affiliates) for conformity with

governing documents and adequate disclosure to investors. SEC

representatives have publicly expressed an interest in this area,

highlighting the “vertically-integrated” nature of certain real estate

management models as a source of potential conflicts. Accordingly,

particular attention should be given to disclosure of real estate

operating fees, including industry-standard leasing, servicing and

property management fees. Where practical, OCIE has also strongly

supported line-item disclosure of transaction-based fees and

expenses when investors receive distributions from the disposal

of a property.

Investment-level fees and expenses: Similarly, review all fees and

expenses paid by the funds to third parties in connection with the

acquisition, holding and disposal of portfolio properties. Although

this has not historically been viewed as “best practice” within

the industry, OCIE has at times taken the position that investors

should be able to inform themselves as to the types (and potential

calculation methodologies) of typical investment-level fees and

expenses that the fund may incur by virtue of certain types of

portfolio investments.

Expense allocation and reimbursement: Ensure that expenses

charged to clients are legitimate fund expenses, within both the

terms of the governing documents of each fund (which are typically

drafted broadly) and the disclosures to investors (Form ADV

and offering memoranda). In particular, establish a written policy

prescribing the reasonable and consistent allocation of expenses

that benefit multiple clients; these vary by firm and by fund, although

some commonly shared expenses include umbrella insurance

policies, market data analyses and certain infrastructure such

as investor portals. Almost as important as the policy itself is

documentation supporting the reasonable basis of those allocations

in the context of the manager’s business. Where clients are subject

to different policies (for example, co-investment vehicles frequently

do not bear many of the typical fund operational expenses),

this should be clearly disclosed in offering memoranda and on

Form ADV.


Our experience of recent examinations reflects the SEC’s increased

interest in the real estate sector, and we expect this pattern to

continue for some time. As a newer group of registrants, real

estate fund managers tend to be less familiar with OCIE’s rigorous

standards and face unique challenges when confronted with their

first examination. Maintaining accurate records and documenting

steps taken in furtherance of the compliance program are vital to

this process. A thorough annual review can assist a fund manager

in identifying areas of potential weakness, but those findings must

be taken seriously. Because you will always know your own business

best, this is not a task that should be left exclusively to external

consultants. Allocating sufficient resources to the compliance

program is the key first step towards successfully implementing those

policies and procedures — in practice and not just on paper.

1 Changes to the Investment Advisers Act of 1940 (as amended, the

“Advisers Act”) contained in the Dodd-Frank Wall Street Reform and

Consumer Protection Act (the “Dodd-Frank Act”) eliminated the widely

relied-upon “private adviser” exemption effective July 21, 2011, although

existing advisers were permitted to continue to rely on the exemption

until March 30, 2012 following an extension of the compliance date.

2 See Schulte Roth & Zabel’s Oct. 9, 2012

Client Alert

, “SEC Announces

“Presence Exams” For Newly-Registered Investment Advisers.” See also

OCIE, Letter Announcing Presence Exams (Oct. 9, 2012).

3 See Andrew Bowden, Director, OCIE, Speech at the Private Equity

International (PEI), Private Fund Compliance Forum 2014 (May 6, 2014).

4 PEI Alternative Insight, “PERE CFO and COO Compendium” (2015), LPs

on the SEC, 17-19.

5 SEC, 2015 Budget Request by Program 50. See also Julie M. Riewe,

Remarks to the IA Watch 17th Annual IA Compliance Conference.

6 SEC, Questions Advisers Should Ask While Establishing or Reviewing

Their Compliance Programs (May 2006).

7 SEC No-Action Letter, Investment Adviser Association (Sep. 20, 2007).

8 See, e.g., SEC National Exam Program Risk Alert, “Significant Deficiencies

Involving Adviser Custody and Safety of Client Assets” (March 4, 2013);

and SEC Compliance Outreach Program, National Seminar (Jan. 30,

2014), Slides.

Real Estate Managers Face New Wave of SEC Scrutiny