The Securities and Exchange Commission (SEC) created an inspections unit dedicated to private equity and hedge funds, which is to be co-chaired by Igor Rozenblit and Marc Wyatt, according to a Reuters report, citing people familiar with the matter.
Rozenblit joined the asset management unit of the SEC’s enforcement division in 2010 and is a former private equity executive with Amundi Private Equity. Wyatt is a hedge fund veteran who joined the SEC in 2012 as a private funds examiner.
The private fund unit will reportedly comprise of existing staff in four of the SEC’s regional offices that will work part-time with Rozenblit and Wyatt on fund examinations. The SEC plans to expand the unit over the course of the next six to 12 months to more regional offices if it proves a success.
Chief compliance officers have told PE Manager in the past that the SEC has not always demonstrated a strong understanding of the private equity asset class. Before Dodd-Frank pushed private equity into the SEC’s oversight in March 2012, the regulator’s attention was more focused on mutual funds, retail investment advisors and other, less complex private fund structures. Some commentators have said the new unit will help the SEC better understand alternative assets. The SEC declined to comment.
“The creation of a dedicated private funds unit within the exam program reflects the Commission’s increased focus on private funds and it’s desire to develop more expertise on the area,” said Rob Kaplan, litigation partner at Debevoise & Plimpton and former SEC investigator.
The news comes as an SEC internal review revealed that more than half of 400 or so private equity firms recently examined haven’t provided LPs enough fee disclosures, a person with knowledge of the SEC’s findings told Bloomberg. While some of the problems appear to have resulted from error, some may have been deliberate, the person said.
“The SEC will likely look for message cases that justify SEC registration by showing that the examination program uncovered harm to sophisticated investors of which the investors were unaware,” said David Vaughan, investment funds partner at Dechert and former SEC policy advisor.
In February, the SEC charged Arizona private equity firm Clean Energy Capital with misallocating expenses to their own private equity funds. Clean Energy attorney Aegis Frumento, a partner at New York law firm Stern Tannenbaum & Bell, said Brittenham and the firm had not broken any laws. “We think the SEC has overreached in this case,” Frumento said. “They have unwarranted interpretation of the law and we look forward to proving them wrong.”
Expensing “questionable” costs has been a common practice at some private equity firms for a long time, one investor source previously told PEM. “Do they take advantage of it? Of course,” the source said. “I think you would be shocked.”
One example involves executives with private jets, which they use for both business and personal travel. According to research from ACA Compliance Group, 30 percent of private equity firms charge all costs of private jet travel to the fund, while 35 percent charge a first-class ticket equivalent when jetting around the world, PEM previously reported.
ACA research suggests that half of private equity firms do not have formal policies to ensure only reasonable expenses are charged to limited partners.