SEC launches PE enforcement initiative

The Securities and Exchange Commission (SEC) has launched the “Private Equity Initiative” to help identify “zombie” fund managers and other firms that pose a higher risk of fraudulent behaviour.

The initiative will be under the remit of the SEC’s Asset Management Unit (AMU) in coordination with RiskFin, the Division of Investment Management and the Office of Compliance Inspections and Examinations (OCIE).

AMU chief Bruce Karpati cited “zombies” as a top priority for private equity enforcement in a speech before the Regulatory Compliance Association last month.  He described these as “funds that are delaying the liquidation of their holdings because the income derived from these assets is their only source of revenue”.

Karpati added that the initiative, “using certain data sources”, will try to identify firms that may have been misrepresenting the value of their holdings to investors. Karpati's “data sources” comment may refer to the agency's ability to conduct on-site examinations of SEC-registered firms, which now stands at over 4,000 private funds advisors following a registration deadline for GPs overseeing more than $150 million in assets last March. He added that registration has produced “more information about more advisers than ever before” to mine for use in the agency's risk analytic initiatives.

In his speech, Karpati also alluded to the SEC’s aim of becoming more effective in its enforcement efforts during 2013 by utilising industry professionals, such as private equity analysts. The specialists will assist on investigations, consult on exams, conduct training and assist on policy making.