When the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations announced their exam priorities for 2018, GPs probably noticed something was missing.
The priorities included cybersecurity, anti-money laundering, and first and foremost, protecting retail investors. But there was no mention of private equity, hedge funds and other alternative assets. As a result, some firms might expect less rigor in exams and lighter enforcement after years of being a very public bee in the SEC’s bonnet.
That would be a mistake. The headlines of the OCIE report don’t mention the industry, but the SEC includes pension funds in its definition of retail investors, so alternative assets remain in its crosshairs. The reality is that if a GP hasn’t had an exam yet, one is on the way. That exam will still treat fees and expenses as a top concern, leading to tough questions about conflicts of interest. They’ll continue to scrutinise valuation and cybersecurity programmes, but now they’re digging deeper into firms’ records and requesting emails more frequently.
That digging, along with word of a sweep of Form PF filings – which are required from managers with more than $150 million in assets under management – indicates the regulator may be compiling data from various sources to identify inconsistencies or troubling patterns in a firm’s various filings. That hunt could lead the SEC to expand its areas of interest to include internal rate of return calculations. So, compliance staff should stay diligent, even if the SEC isn’t calling out the industry in public.
“The SEC often thinks of private equity as having a retail component,” says Jason Brown of Ropes & Gray. “Because public employee pension funds invest in private funds, they see those employees as retail investors in need of protection.”
Ken Joseph is the former head of the SEC’s Investment Management Examination Program and currently at Duff & Phelps, and he believes the regulator defines the ‘retail’ category broadly. “If private funds manage retail or retirement money, directly or indirectly through foundations or pension funds or other institutions, they’ll be considered part of this effort.”
So GPs shouldn’t expect exams to slow or stop any time soon. “If a firm hasn’t faced an exam yet, or hasn’t been examined in seven to 10 years, they should expect to be part of the regulatory focus,” says Joseph. And those exams will continue to focus on the priorities that were in the headlines back in 2015, when the SEC was talking about the need for more “sunshine” on the industry.