CFM Investor Relations & Reporting 2 — Questions and Answers
Question 1: Under SEC Rule 206(4)-7, registered investment advisers must review their compliance policies and procedures at minimum how often?
- Monthly
- Quarterly
- Annually (Correct answer)
- Biannually
Correct answer: Annually
SEC Rule 206(4)-7 requires RIAs to review their written compliance policies and procedures at least annually.
Question 2: A fund manager sends investors a tear sheet showing a 3-year annualized return of 18.2%. Which GIPS standard provision is most directly relevant?
- All performance must be net of taxes
- At least 5 years of GIPS-compliant history must be shown
- Returns must be presented alongside a benchmark
- Composites must include all fee-paying discretionary accounts (Correct answer)
Correct answer: Composites must include all fee-paying discretionary accounts
GIPS requires that composites include all actual fee-paying discretionary portfolios managed to a similar strategy.
Question 3: Which document typically governs the frequency and format of capital account statements sent to limited partners in a private fund?
- Form ADV Part 2A
- The Limited Partnership Agreement (LPA) (Correct answer)
- SEC Form PF
- The fund's marketing deck
Correct answer: The Limited Partnership Agreement (LPA)
The LPA is the governing contract between the GP and LPs that specifies reporting obligations, timing, and format.
Question 4: An investor requests side-letter provisions granting most-favored-nation (MFN) status. What does this primarily entitle the investor to?
- A lower management fee than all other investors
- Access to any more favorable terms granted to other investors (Correct answer)
- Priority redemption rights in a liquidity event
- Reduced carried interest on co-investment vehicles
Correct answer: Access to any more favorable terms granted to other investors
MFN clauses entitle an investor to elect any more favorable terms granted to other LPs in their side letters.
Question 5: A hedge fund's capital account statement shows a beginning NAV of $10M, contributions of $2M, withdrawals of $1M, and an ending NAV of $12.5M. What is the fund's investment gain for the period?
- $1.5M (Correct answer)
- $2.5M
- $0.5M
- $3.5M
Correct answer: $1.5M
Investment gain = Ending NAV − Beginning NAV − Contributions + Withdrawals = $12.5M − $10M − $2M + $1M = $1.5M.
Question 6: Which of the following is the primary purpose of a fund's audited financial statements prepared under U.S. GAAP?
- To calculate carried interest distributions
- To provide an independent verification of the fund's financial position and performance (Correct answer)
- To satisfy CFTC commodity pool reporting requirements
- To determine the hurdle rate for the next performance period
Correct answer: To provide an independent verification of the fund's financial position and performance
Audited financial statements provide independent third-party verification of the fund's assets, liabilities, and results of operations.
Question 7: When a private equity fund reports an unrealized investment using the 'market approach,' which valuation methodology is most commonly applied?
- Discounted cash flow analysis
- Replacement cost method
- Comparable company / comparable transaction multiples (Correct answer)
- Adjusted book value
Correct answer: Comparable company / comparable transaction multiples
The market approach typically uses EBITDA or revenue multiples derived from comparable public companies or recent private transactions.
CFM Investor Relations & Reporting 2
Under SEC Rule 206(4)-7, registered investment advisers must review their compliance policies and procedures at minimum how often?