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A year-and-a-half ago, Jay Clayton’s Securities and Exchange Commission came to a disturbing conclusion: Private equity funds fell into the same relationship with truth as the man who put Clayton at the helm of the nation’s premier securities regulator. Which is to say, they were a bunch of bald-faced lying liars without an ounce of interest in transparency if the avoidance thereof would earn them an extra nickel, especially when it came to allocating fees to clients. Not that it prejudiced him against the p.e. industry in any meaningful way, but there it was.

Now, Clayton’s successor, Gary Gensler, is a bit less friendly to private fund types. In fact, he’d like to know a whole more about what they’re doing, the better to eventually stop them doing it. And to that end, he’s had his people take a look at the things p.e. firms are saying to their clients, and he’s not finding any more candor than did the last guy. In fact, he’s not finding a shred of truth in a lot more places.

By giving misleading and inaccurate information to investors, private-fund managers may have been able to charge unfairly high fees, the regulator said Thursday in a public letter, called a risk alert. The letter described more than a dozen types of problems it uncovered in its examinations of private-fund advisers, without naming the firms involved….

The SEC also highlighted misleading marketing methods. In presenting their investment performance to prospective investors, some managers “only marketed a favorable or cherry-picked track record” and “presented inaccurate performance calculations,” the regulator said.

The letter also warned of the use of contract language that reduces the fiduciary duty that a fund manager owes to an investor, a practice that private-equity investors have asked the regulator to ban….

Thursday’s risk alert highlighted four broad categories of problematic conduct by managers: not following the policies they tell investors they will follow, misleading investors about performance, failing to properly investigate investments and service providers, and improperly using contract language to reduce their legal obligations to investors.

SEC Finds Some Private-Fund Managers Mislead Investors on Performance [WSJ]

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