SEC ramping up private real estate exams

In a webinar last week on calculating and reporting performance, consultant ACA Compliance revealed that it has seen an uptick in recent months in the number of its private real estate fund clients that are being targeted for exams by the US Securities and Exchange Commission (SEC).

Those real estate fund exams have focused heavily on financial records, fee calculations and expense allocation practices at the fund and property levels, as well as on marketing materials and performance return calculations, noted ACA Performance Services managing director Karen Foley.

The new trend is consistent with remarks made by Igor Rozenblit, head of the SEC’s private funds taskforce, in January at the PEI CFO and COOs Forum when he noted that his crew of private equity specialists would be branching out to other illiquid asset classes, presumably referring to real estate.

The webinar focused on the SEC’s evaluation of performance for both real estate managers and private fund managers in general. To prepare for an exam, firms should ensure that they have access to all books and records that support marketed performance including account level holdings, transactions, contracts and investment guidelines and that this information can be retrieved in a timely manner during an exam, Foley noted.

ACA included a sample list of documents the SEC may request during exams in order to assess a firm’s performance claims. The list included an adviser’s balance sheet (including the trial balance, general ledger, cash receipts and disbursements journal, income statements and cash flow statements); all pitch books, one-on-one presentations and pamphlets or brochures; any advertisements (including on websites or blogs); monthly performance returns for each fund; and all completed requests for proposal and due diligence questionnaires.

ACA also cited direct quotes from SEC deficiency letters clients have received regarding performance.  The letters included comments such as: “registrant did not maintain work papers and the necessary documentation to substantiate the performance returns presented in its marketing materials for its entire performance history” or “registrant could not provide supporting documentation to substantiate the number of accounts for XYZ strategy as presented on the firm’s website.”

With those examples in mind, ACA recommends that managers enhance policies and procedures and internal controls, ensure books and records exist and are readily available (for all periods that performance is shown) and read disclosures to be sure they accurately reflect the performance being presented.