‘We want to understand the structure of the industry, the customs and practices, the incentives that exist for managers, and trends and risks that could enable us to more effectively spot or investigate fraud.”
Those were the words of Bruce Karpati, as he was addressing an audience of private equity compliance officers and other back-office professionals attending PEI CFOs and COOs Forum 2013 who were eager to hear what message the Securities and Exchange Commission’s top enforcement chief had for them.
Kaparti stressed that the SEC has taken pains to better understand the asset class and wider alternative assets industry, hiring an “industry specialist” and “several attorneys” to gain on-the-ground knowledge about the market.
Due to limited resources, the SEC is using a “risk analytics” strategy designed to target fund managers that appear to pose a higher risk of fraudulent behavior, PE Manager reported a few months previously.
“By its nature, fraud is hidden and our ability to detect anomalies – a fee calculated in an odd way, a unique valuation methodology, an incomplete disclosure made to investors – has helped us to better allocate resources,” Karpati told delegates.
GPs that have recently undergone SEC inspections, however, said there was a learning curve for SEC examiners.
“We found we often had to carry the interview,” said one compliance officer speaking with PE Manager about his experiences with examiners.
Another SEC-registered GP added examiners “started to ask me about how we calculate fees, and then it became obvious to me that during questioning they were confusing us with hedge funds.”
The SEC is also seeking information about how firms meet their investors, draft agreements with placement agents and what types of disclosures are made. Many legal experts during the conference warned GPs that disclosures are a key item on the SEC’s agenda. “Even something as simple as whether or not you intend to fly first class to a meeting should be stated upfront for investors,” one private equity lawyer told PE Manager.
The first compliance officer explained that after the examination was completed, the SEC “had asked us not to characterize the results of the exam. They emphasize it is an evolving process. That they are still learning, and likely to be back in a few years for a more informed review.”