Lessons from Igor

Recently pfm interviewed the SEC’s in-house private equity specialist Igor Rozenblit. For any GP still feeling nervous about disclosure shortcomings, or the new private fund inspections unit, his message is worth listening to. 

If you couldn't make it to this year's PE VC Finance and Compliance Forum 2014, hosted by parent publisher PEI in San Francisco earlier this month, you missed out on the chance to catch up with Igor Rozenblit, the SEC’s most knowledgeable private equity inspector.

Indeed, Rozenblit was recently tapped to co-chair an inspections unit dedicated specifically to private funds. At our event, pfm asked him what a visit from this team of specialists would involve – and more pertinently, what GPs could do to satisfy their expectations on disclosures. Here’s what he had to say:

Precision strikes:  

The inspections unit consists of 13 people, including Rozenblit and his co-captain Marc Wyatt (a hedge fund specialist). As of now, the unit is based across five offices: New York, Boston, Washington DC, Chicago and San Francisco. Interestingly, the SEC chose to fill the unit with long-time examiners who are learning the private fund model, as opposed to starting with industry practitioners and turning them into examiners.

So what does a visit from this special squad of inspectors involve? According to Rozenblit, the process isn't all that different from a normal exam except that “it maybe runs a little bit deeper and is more thorough”. Another small difference: this team will probably spend more time on the phone before they arrive on site, asking about the firm and its inherent risks; Rozenblit said that should mean the onsite portion of the exam actually ends up being shorter and “much more focused”.

Asked whether the SEC had any plans to expand the unit, Rozenblit said that since the unit was still relatively new, “talk of expansion is premature” – although he did note  that its remit currently covers virtually all of the US private fund universe.

Forget vintages:  

CCOs have wondered whether funds formed before 2012 – when LP best practices were still being developed and SEC registration wasn’t a requirement for most GPs – were being given more leeway. When asked about this, Rozenblit was pretty unequivocal: 

“SEC examiners review advisers and their practices, not individual funds. It is therefore impossible for us to draw a relationship between fund vintage and bad conduct. Usually, but not always, conduct is consistent across all funds, without regard to vintage.”

Last minute disclosures:  

We also asked about disclosures, which more GPs have been focusing on since Drew Bowden's “Sunshine” speech earlier this year at PEI’s Private Fund Compliance forum in New York. Rozenblit stressed the speech wasn’t intended as the “SEC wagging its finger” at the industry; quite the opposite, in fact: “That speech was based on our belief that private equity is a critical part of the US economy and is fundamentally run by good people who want to do the right thing for their investors.”

As reported on pfm, many GPs have been updating their Form ADV Part 2 with more detailed disclosures to plug any transparency gaps (on things like fees or valuation). However, Rozenblit warns that “it is not usually sufficient to provide disclosures after the fund is closed and LPs are already locked in”. So what options do GPs have if their fund is already closed? “One possible remedy would be to amend the LPA, and productively engage investors to determine a fair approach and resolution.” Interestingly, Rozenblit confirmed previous pfm reports that disclosures made to a LPAC weren’t always enough, either. “It depends on the powers vested in the LPAC by other investors (through the LPA) as well as the amount of capital represented by the LPAC,” he told the room. Needless to say, many of the attentive compliance officers present were taking copious notes.

PS – Still unsure about the strength of your compliance? In pfm's November issue, subscribers will be able to see the results of unprecedented research into how GPs are allocating various fees and expenses, including LP travel costs for annual meetings, legal bills stemming from a SEC presence exam and due diligence expenses. It’s the first time such a detailed benchmarking survey has been completed on on this subject, which makes the results particularly valuable for an industry still adapting to the post-registration era. To subscribe, click here.