Maintain your compliance policies, delegates at last year’s Private Funds Finance and Compliance Forum in San Francisco were told, even if (and it was a big if at the time) “anti-finreg” presidential candidate Donald Trump was voted into office. Twelve months on, and one election later, those that took heed must be breathing a sigh of relief.
The Securities and Exchange Commission has continued its private funds examination program apace. Frontline staff are as active as ever and in the past seven weeks alone there has been “a flurry of exams launched,” delegates at this year’s conference were told. The anticipated slowdown under Trump hasn’t happened, and having installed and educated a 40-strong private fund examinations unit, the SEC fully intends to continue using it.
Examination priorities are also largely unchanged. Fees and expenses remain under the spotlight – one regulatory lawyer said around 80 percent of the feedback firms receive after an examination is about this aspect. Other topics of interest are political contributions and marketing material compliance, “the standard checklist” as one of the panelists, whose firm recently went through an exam, put it.
But there has been one notable change. Far fewer exams have led to fines, industry suspensions or barrings in 2017 than in previous years. The lawyer said he is involved in six or seven that are yet to go public, but there has been a “significant slowdown.” This could be a momentary pause – there are two empty seats on the commission, so it is more difficult to get the required majority vote on whether action should be taken.
But it might be because the industry is shaping up. The purpose of enforcement action is to inform policy, hold firms to account for flouting the rules and to make a point to the industry as a whole. The agency feels it is no longer necessary to pursue action for small infractions by small firms to illustrate how it expects the rest of the industry to operate because the industry now knows what it should do. And this, one of the compliance experts said, is why firms should continue to strengthen their compliance policies; operating transparently and sticking to the rules is the right way of doing business, for all concerned.
For those not convinced, the panel offered an alternative view. There is no evidence enforcement will remain at a lower level, and even if it does the only way to guarantee you avoid the consequences of a regulatory breach is to “run a transparent shop”.
Whether it’s taking action or not, the regulator is watching – and private fund firms shouldn’t take their eye off the compliance ball.