Get it in writing

The need to keep a paper trail was a recurring theme among experts at the PEI Private Fund Finance and Compliance Forum in San Francisco this month. The nature of the trail – be it physical or virtual – is not important, but having it is deemed essential. Here are three key areas in which industry professionals are advised to document their activities.

Broker-dealer registration

While not thought to be a key priority, registration of broker-dealer staff at private fund houses is on the regulator’s agenda. As such, managers should carry out an assessment of whether it needs to catalog staff as broker-dealers, and document this process. As one GP said: “Being able to provide documents to evidence to the SEC that you have taken the matter into consideration, regardless of your conclusion, could be invaluable in the case that the regulator steps in to investigate your firm.”

Valuations

Firms are now required not only to produce written valuation methodologies, but also document the testing of those methodologies.

“Please take it seriously, and document your processes,” one auditor said.

These documents are considered essential, as it is widely accepted the SEC is more concerned about there being a tried and tested methodology in place, than the accuracy of a valuation.

There is also consensus that regulators are demanding an increasing number of such documents. “It’s an ongoing evolution, regulation will remain in place, so robust methodologies and reporting must continue,” said one GP.

Fees and expenses

Since the SEC began a crackdown on what it deems “improper expenses and hidden fees” an increasing number of US-based private fund houses are publishing detailed policies on such areas.

“Everything should be put in writing. It should be black and white with no room for interpretation,” one GP said.

And these policies should be explicit. “If you use private jets, this should be spelled out in the document, as should the time after which you can expense laundry costs for example,” the GP added.

Another said it was important to ensure expense claims were submitted with hard copies of receipts and invoices for the charges.

Not content with the creation of this document alone, many firms are also testing their policies to ensure they are realistic, and subsequently documenting the results of these tests.

“The SEC can ask for both the written policy itself and documentary evidence that you have checked it. It’s really important to think about how you present this [test] data to the regulator,” the GP warned.