SEC compliance risks for healthcare and life sciences private funds (and how to avoid them)

The SEC increasingly uses classic Advisers Act issues (such as fees, conflicts, valuation, MNPI controls, and recordkeeping) as a window into the broader health of a firm’s compliance culture. Even when a problem starts at the portfolio company level, exam teams often focus on the adviser’s response, including how it was evaluated, documented, reflected in valuation and disclosures, and communicated to investors.

Analysis of recent private fund enforcement shows cases involving disclosure violations, fee and expense practices, improper hedge clauses, deficient redemption practices, and off-channel communications, involving both hedge and private equity managers.

Common SEC exam requests for healthcare and life sciences funds

Most exams begin with structured requests designed to test whether controls are “reasonably designed” and consistently followed.

Common requests include:

• Policies and procedures: MNPI, valuation, fees/expenses, conflicts, marketing, recordkeeping
• Fee and expense policies, offset calculations, and supporting workpapers
• Valuation committee materials and third-party valuation support
• Expert/consultant documentation: onboarding, contracts, approvals, and monitoring
• Testing logs, training records, and escalation documentation
• Communications and recordkeeping evidence, including off-channel controls

Fees, expenses, and conflicts of interest

SEC scrutiny of fee and expense practices applies across private funds, but life sciences and healthcare strategies often introduce extra complexity in the economics. This is especially true where portfolio companies use MSO structures, strategic partnerships, data/technology arrangements, or specialized consulting relationships.

Conflicts can be particularly layered when funds have:

• Cross-fund participation in the same clinical platform or provider roll-up
• Co-investments or revenue-sharing with physicians, MSOs, or strategic partners
• Related-party data, technology, or consulting agreements with portfolio companies
• Operating partner or expert compensation tied to portfolio milestones

In practice: Drift is a common exam pain point, even over missing disclosure. New economic arrangements emerge over time (new vendors, expanded expert programs, platform service agreements, etc.), but disclosures and testing cadence don’t always keep pace. A lightweight quarterly refresh process can reduce drift without creating compliance drag.

Valuation controls for Level 3 and illiquid healthcare assets

Life sciences and healthcare portfolios often include early-stage therapeutics, devices, diagnostics, digital health platforms, or distressed providers valued using significant unobservable inputs. Regulators continue to focus on valuation, especially where it drives performance reporting, investor communications, and fees.

Life science and healthcare-specific valuation pressure points include:

• Assumptions around trial probabilities, regulatory milestones, or time-to-approval
• Delayed valuation adjustments after FDA feedback, safety signals, or trial disruptions
• Coverage and reimbursement assumptions that don’t reflect real payor behavior
• Thin documentation for valuation judgments shared with investors or boards

In practice: Valuation processes often break at handoff points. Investment teams learn something material, but the information doesn’t flow cleanly into valuation governance. A standard material event intake template can help ensure timely reassessment and exam-ready documentation.

MNPI, research practices, and “shadow trading”

MNPI (material nonpublic information) is a heightened risk in healthcare and life sciences because research often relies on information channels closer to decision-making than in many other sectors. Strategies may involve clinical experts, KOLs, physicians, consultants, vendor personnel, and reimbursement advisers who can have access to sensitive information before it becomes public.

Common MNPI pathways in healthcare and life sciences include:

• Clinical trial dynamics: interim results, safety signals, enrollment issues, and protocol changes
• Regulatory interactions: nonpublic FDA feedback and timing implications
• Reimbursement intelligence: coverage decisions, pricing signals, and contracting outcomes
  Deals and financings: M&A discussions, licensing deals, and structured financings
• Committee roles: steering committees, advisory boards, hospital committees, and creditor committees

“Shadow trading” risk in healthcare and life sciences

The SEC has advanced “shadow trading” theories, where MNPI about one company is used to trade a different, correlated issuer likely to be affected. In healthcare, correlations can be strong—for example, trial outcomes moving competitors or supply-chain peers.

​​Recently, the Commission charged an alternative asset manager that invested heavily in distressed companies for failing to adequately supervise and monitor a consultant serving on creditors’ committees, emphasizing the adviser’s obligation to proactively oversee external experts and their access to MNPI. These themes translate directly to life sciences funds that rely on scientific and clinical experts, hospital administrators, or reimbursement consultants.​

MNPI controls the SEC expects:

• Expert/KOL governance: clear onboarding, scoped engagement topics, MNPI restrictions, and monitoring
• Tiered controls: higher requirements for trial-site personnel, committee members, or reimbursement insiders than for general operators
• Research documentation: written procedures for clinical/regulatory research and escalation paths
• Trading controls: restricted/watch lists, preclearance, and documented MNPI assessments
• Scenario-based training: realistic situations (including clinical update calls, investigator interactions, payor conversations, conferences, post-call notes)
• Surveillance and evidence: proof controls operate day-to-day, not just on paper

In practice: Treating all “experts” the same way is a frequent root cause of failure. In healthcare and life sciences, the risk profile changes dramatically depending on whether someone is a general industry expert versus a trial-site participant, steering committee member, or reimbursement insider. Tiered controls are often both more practical and more defensible.

Fraud and abuse, FCA, and sponsor “look‑through” exposure

This article focuses on securities law and adviser compliance, but healthcare fraud and abuse regimes, especially the False Claims Act (FCA) and Anti-Kickback Statute (AKS), shape the risk profile of many healthcare and life sciences portfolios. DOJ, HHS-OIG, and state authorities continue to scrutinize reimbursement practices, billing and coding, marketing and referral relationships, and incentive structures.

Regulators are also paying more attention to investor and sponsor involvement where private equity owners exercise control, design incentives, or knowingly tolerate problematic practices.  Some states have gone even further; recent legislation in Massachusetts extends FCA-style liability to healthcare investors who fail to disclose certain ownership and control information, underscoring a policy shift toward holding investors responisble for portfolio company misconduct and compliance.

For advisers, the goal is to recognize when healthcare regulatory exposure becomes material for valuation, risk disclosure, and investor communications.

In practice: To mitigate risk from healthcare regulators, advisers should:

• Scrutinize high-risk areas (billing and coding, medical necessity, referral and marketing arrangements, quality-of-care issues)
• Treat material FCA/AKS risk as relevant to valuation and investor reporting
• Ensure governance supports escalation, remediation tracking, and board-level oversight documentation

Licensing, reimbursement, and state‑level investor oversight

Healthcare portfolio companies operate within complex licensing, certification, and reimbursement frameworks—for example, Medicare/Medicaid enrollment, commercial payor contracts, and facility or practitioner licensing. Failures can trigger overpayment liability, FCA exposure, operational interruptions, and reputational harm, often with knock-on effects for valuation and disclosures.

States and attorneys general are also paying closer attention to private capital ownership of healthcare providers and facilities, including transaction notice/approval requirements and reporting on ownership, governance, and service changes. These regimes often intersect with corporate practice of medicine (CPOM) constraints and MSO structures.

In practice: Advisers have securities law obligations to:

• Diligence state‑level investor oversight and disclosure requirements in the structuring phase of each transaction
• Accurately describe ownership structures, MSO arrangements, and regulatory approvals in offering documents and ongoing reporting
• Reflect material state enforcement, license actions, or transaction delays in risk disclosures and valuation processes

Enforcement pattern #1: Fees and conflicts that don’t match fund documents

Based on recent enforcement actions, the SEC is less focused on whether a conflict exists and more focused on whether the adviser described the conflict clearly, followed the governing documents, and documented governance steps.

Common enforcement targets include:

• Fee/expense disclosures too vague to match actual practice
• Offset mechanics or allocations that don’t match fund documents
• Related-party arrangements not fully and fairly disclosed
• LPACs not receiving enough information to evaluate conflicted decisions

How to reduce risk:

• Align disclosures across PPM, LPA, side letters, ADV, investor reporting, etc., and consolidate one source of truth
• Maintain a conflicts inventory and update it when economics change
• Run periodic fee and expense testing against documents
• Document governance steps, such as LPAC materials, approvals, minutes, and rationale

What exam teams ask for:

• Fee calculation workpapers and offset policy/testing evidence
• Expense allocation methodology and invoice support
• Side letter log and preferential treatment disclosures
• Related-party agreements (service, data, technology, consulting) and approvals
• LPAC notices, decks, minutes, and consent records

Enforcement pattern #2: MNPI controls and non-trading violations

The SEC continues to bring MNPI-related cases for both trading and control failures (charging advisers where MNPI policies and procedures are not reasonably designed or not implemented). In healthcare and life sciences funds, research often relies on expert interactions and clinical or regulatory information channels.

Why the SEC still charges non-trading violations:
The Advisers Act requires advisers to adopt and implement policies reasonably designed to prevent violations. Weak MNPI controls and poor documentation can constitute a standalone compliance failure, even without an allegation of insider trading.

How to reduce risk:

• Treat MNPI controls as a research governance system, not just a trading policy
• Segment expert types and apply tiered onboarding and monitoring
• Require written documentation for MNPI assessments and escalations
• Keep training realistic for clinical, regulatory, and reimbursement information flows

What exam teams ask for:

• Expert/KOL onboarding, contracts, topic restrictions, and monitoring evidence
• Logs showing approvals, escalations, restricted/watch list activity, and preclearance
• Training completion records and role-specific training materials
• Written research procedures for clinical/regulatory contexts
• Evidence of ongoing testing and surveillance

Risk assessment and governance that fit the strategy

Given the overlap of securities and healthcare regulatory risk, sector-focused funds benefit from a formal risk assessment that is refreshed periodically and tied to the investment lifecycle.

A practical risk assessment should:

• Identify key touchpoints: SEC, DOJ, HHS-OIG, FDA, state regulators, and attorneys general
• Map risks to specific strategies and portfolio types: including fees and expenses, conflicts, valuation, MNPI, fraud and abuse, licensing and reimbursement, privacy and cybersecurity

Pre-investment compliance considerations:

• Diligence checklists tailored to clinical, regulatory, billing/reimbursement, and data privacy risk
• Review of prior FCA/AKS settlements, integrity agreements, and screening frameworks
• Structuring review for state oversight and CPOM/MSO constraints

Post-investment compliance considerations:

• Board-level reporting on regulatory and compliance issues
• Remediation tracking with owners, timelines, and closure evidence
• Event-driven valuation and disclosure review when material developments occur
• Periodic independent reviews (fund-level and/or portfolio-company level, as appropriate)

Exam-ready policies and documentation

Rather than re-litigating the “why,” the focus should be on whether program components exist, operate, and leave an audit-ready trail:

• MNPI components: written policy, tiered expert onboarding, restricted/watch list procedures, surveillance/testing, escalation documentation, and scenario-based training artifacts
• Fees and expenses: allocation/offset policy, periodic testing, invoice support, conflicts inventory, and governance documentation
• Valuation components: written policy, event-driven reassessment triggers, valuation committee governance, and documentation standards for assumptions
• Recordkeeping components: communications governance, retention and supervision protocols, and evidence aligned with disclosures

Training and third‑party oversight

Sector funds reduce risk when training and third-party oversight reflect real workflows:

• Training: role-specific modules covering conflicts basics, fees, valuation event triggers, MNPI research governance, healthcare fraud, abuse red flags, and state oversight trends
• Third-party oversight: diligence and monitoring of consultants, CROs, expert networks, and vendors touching MNPI or compliance-sensitive functions; attention to conflicts and data use
• Cybersecurity and privacy: baseline controls and escalation triggers for data-rich or digitally enabled healthcare assets, integrated into risk management and disclosures

What does the SEC look for in a private fund adviser exam?

The SEC generally focuses on fees and expenses, conflicts, valuation, MNPI controls, and recordkeeping, then tests whether your disclosures and practices line up. Exams often start with document requests that let staff trace calculations and governance decisions.

How do private fund advisers handle fee offsets and expense allocation for SEC exams?

The best way to reduce SEC risk around fee and expense allocation and offsets is a repeatable approach:

1. Confirm what fund documents require
2. Translate that into a clear written policy
3. Test calculations periodically
4. Keep clean workpapers and governance records, including LPAC documentation where relevant

What MNPI controls does the SEC expect for expert networks and consultants?

The SEC expects research-ready MNPI controls: structured onboarding, contracts that restrict MNPI, topic scoping, monitoring, escalation pathways, and evidence that these controls are used in practice (not just written down).

How should private funds document valuation for Level 3 assets?

Regulators expect valuation methods to be documented, consistent, and governed, with clear triggers to reassess when material events happen. In this sector, “material events” are often clinical, regulatory, or reimbursement developments.

How do FCA and Anti-Kickback risks affect fund disclosures and valuation?

FCA and fraud-and-abuse exposure can become material when billing, referral, or marketing practices create financial or regulatory risk that could affect valuation, performance reporting, or risk disclosures. Funds should have escalation and oversight processes that ensure these issues are documented and evaluated appropriately.