SEC sends reminder about 'exemptive orders'

Private equity firms managing an employees' securities company should take heed of a SEC warning to review certain compliance protocols.

Private equity firms with an “in-house” private equity fund (formally known as an employees' security company, or ESC) should consider a recent Securities and Exchange Commission (SEC) warning shot about their “exemptive order” requirements.

The SEC provides exemptions from certain aspects of investment company regulation to employee investment vehicles that may not fall within traditional private fund exemptions. These “exemptive orders” are issued by the SEC based on a registered investment adviser making representations and warranties that they meet certain conditions. 

However, firms with an ESC, which some large firms offer their staff, may be impacted by a SEC memo issued this week warning about discovered compliance gaps in exemptive orders. 

“One way for such entities to address such risk is to adopt and implement policies and procedures … that are reasonably designed to ensure ongoing compliance with each representation and condition of the order,” the SEC said. 

“The guidance update is a useful reminder to ESC sponsors and others that rely on SEC exemptive orders to comply with the conditions in their applications. The SEC staff takes them quite seriously and a failure to comply could result in a number of violations of federal securities laws,” said Debevoise & Plimpton funds partner Ken Berman, in an interview with PE Manager