Compliance-ready

One of the speakers that made delegates sit up and take notice at last week's PEI Private Fund Compliance Forum in New York was Carlo di Florio, the man in charge of running the US Securities & Exchange Commission’s 900-strong inspection force.

PE Manager editor Nicholas Donato had the privilege of sitting down with di Florio to deliver some questions many delegates in attendance were hoping to hear answers to: Is the SEC planning a round of inspections in the near- future? If so, who might be targeted? And most of all, how exactly do firms keep the SEC happy if selected for review? Perhaps to the surprise of some, di Florio did not mince words in his responses.

The SEC, in its attempt to provide a clear understanding of its expectations, is crafting a letter that lays out what it means to be a registered private equity firm that will detail what they consider the industry’s “highest-risk areas”. This will be followed by a round of inspections later this fall on “a significant percentage of new registrants”; presumably as a way of testing how the freshman class of registered advisors is faring so far and to provide SEC inspectors more experience in assessing the private equity industry. From there expect di Florio and his team to provide feedback on what was discovered and where improvements can be made. With respect to the third question above, check out some of our coverage of the event here.

During the interview di Florio also said the SEC is taking greater strides to hire inspectors with a working knowledge of the alternative assets universe. On the plus side that should mean inspectors no longer take a “check the box” approach; but instead judge firms using a risk-based assessment that takes into account GPs’ individual characteristics. The downside is firms should as a result probably expect more intensive (and lengthy) inspections. 

However not all delegates spoken to during sideline conversations feel that an incompetent inspector is a thing of the past. Others delegates expressed suspicions that inspectors unable to find deficiencies at a firm were being given the message that they were simply not looking hard enough. The SEC, it seems, is playing it extra safe to avoid another Madoff on their hands.

No matter, it will be up to GPs’ compliance teams to deliver on the SEC’s demands. The good news is the government is being transparent in its expectations. And for those firms (un)lucky enough to receive an examination come this fall, those expectations will only become all the more apparent.