Compliance officers gathered at the PE/VC Finance & Compliance Forum 2014 in San Francisco this week, hosted by parent publisher PEI, report a change in tone when it comes to regulatory inspections.
In a relatively short six month time period, inspection staff from the Securities and Exchange Commission (SEC) have begun investigating a wider spectrum of issues during presence exams, are asking more drilled-down questions and leaving less wiggle room on disclosures, CCOs and their legal advisors tell pfm.
Sources point to a speech made by the agency’s director of Office of Compliance Inspections and Examinations, Drew Bowden, as the main driver behind the trend. In May, Bowden delivered his “Spreading Sunshine in Private Equity” speech at the 2014 PEI Private Fund Compliance Forum that aired a laundry list of fees and expenses the agency finds questionable or downright fraudulent.
Before the speech a normal inspection may start with a phone call from SEC inspectors who would show up a few days later for a presence exam that focused on a limited number of issues, one regulatory lawyer in attendance said. After the speech, the lawyer said the SEC is having phone conversations “that can last up to four hours” before even arriving and afterward sending follow-up request letters that are more tailored to the firm under review. At a general level, more inspectors are also probing a wider spectrum of issues and no longer limiting their investigations into one particular function or area such as valuation or fees, he said.
“In the past six months, or past two years really, clearly they've gotten up to speed with how our industry works,” the lawyer said.
These longer preparation times are kicking out when the SEC shows up after the initial request letter is sent, delegates at the conference shared. After learning the firm has been targeted for an exam, inspectors may need up to six weeks before arriving onsite.
Another difference relates to disclosures. Before the “Sunshine” speech, it was believed that disclosing certain fees and expenses to a limited partner advisory committee was a quick cure for investor approval. Today some inspectors are beginning to question if these types of disclosures must be notified to every LP, and not just those sitting on the advisory committee, one compliance expert at the forum warned. Others noted that the SEC was beginning to flag disclosures made after commitments were sealed, meaning LPs had less opportunity to question them during negotiations.
“It's scary to think these types of disclosures are being questioned, but that's the world we live in now,” the compliance expert said.