Compliance during SEC exam is key

The Securities and Exchange Commission’s approach to examining a private debt firm is likely to be the same as for other firms in different asset classes, but compliance with requests for information is key, according to chief compliance officers at the inaugural PDI CFOs & COOs Forum in late June.

“One thing that surprised me was how persistent they can be when they have a particular issue in their mind,” one CCO said. This person mentioned SEC examiners were interested in the private debt firm’s allocation process because of the number of vehicles they held and its assets were spread out in various funds and accounts.

“There were multiple requests, and multiple subsequent requests, and meetings, and it speaks of them being persistent,” the CCO added.

The SEC won’t differentiate its exam by asset class, but one of the common aspects they looked for was the firm’s take on valuation, one compliance officer said.

In a short survey at the conference, when asked if their firm had been examined by the SEC in the past 18 months, seven attendees replied they had. Five underwent full exams and two had presence exams, which covers certain areas of operations such as portfolio management, marketing and conflicts of interest.

Compliance officers offered some of the same advice provided by other executives that oversee other alternative asset investment strategies: be calm and be honest during the entire process; educate and prepare the staff on potential exams; be in the same room as colleagues being interviewed by the SEC; and have documents readily available on request.

One piece of advice offered by a compliance officer is to stick with the questions being asked and don’t volunteer information, adding that SEC officials are most likely not to pursue the subject further if you provide them with documents.

Following the exit interview, there will be time to respond, and the general tone is to be respectful of their findings. One compliance officer suggested that executives may disagree with some of the SEC’s interpretation of the facts in the exam but follow up by addressing their concerns, which might include providing additional disclosures or tweaking certain procedures.