SEC wants admissions, bars, Grewal says

The SEC will pursue admissions of guilt in its enforcement cases, and may well pursue executive banishments, new Commission enforcement director Gurbir Grewal says. 

“When it comes to accountability, few things rival the magnitude of wrongdoers admitting that they broke the law, and so, in an era of diminished trust, we will, in appropriate circumstances, be requiring admissions in cases where heightened accountability and acceptance of responsibility are in the public interest,” Grewal said, speaking at PLI’s annual SEC Speaks conference. “Admissions, given their attention-getting nature, also serve as a clarion call to other market participants to stamp out and self-report the misconduct to the extent it is occurring in their firm.”

Grewal is the former attorney general of New Jersey. His October 13 speech to PLI was only the second time he’s spoken publicly since taking over the Commission’s Division of Enforcement in July. It’s been enough: private fund advisers have been in a low-key sweat about what they’re hearing from Grewal and his colleagues. 

‘Under the microscope’

“It’s a time for change for private funds,” says Igor Rozenblit, former co-head of the SEC’s Private Funds Unit, now with Iron Road Partners, a compliance consulting firm. SEC chairman “Gary Gensler has not been shy in publicly talking about the fact that people in financial services make too much money,” Rozenblit said. “One of his goals is to reduce the amount of money that financial services make. Private equity is a pretty high-fee industry, and I’m thinking, he means them.”

There have been scattered reports already about a more aggressive posture from private fund examiners – longer look-backs, broader and deeper questions. It’s not just Gensler, though. The Commission is on its second decade since Dodd-Frank, and its staff expertise has grown steadily, says Margaret Nelson, a former enforcer in the SEC’s Chicago office who’s now a partner with Foley & Lardner. 

“I think there’s an awareness that private funds are going to be more under the microscope,” Nelson said. “The initial thinking was that, with private funds, you needed to worry less because they have institutional investors. You can see in Gensler’s most recent testimony, however, the focus on pensions – there’s an awareness that private funds have mom-and-pop investors behind them, even if indirectly.”

Whether Gensler is the hammer or the anvil, Grewal has made clear that the Commission is ready to bang away. In his speech to PLI, he said he’d like to flatten the time between exam deficiencies and enforcement actions. 

Fees and expenses

So what can compliance officers do? Nelson suggests they begin at the beginning. 

“The SEC is always going to start with fees and expenses,” she said. “The first thing is to do a deep dive to make sure that all your fees are clearly disclosed, make sure that all your expenses and their allocations are disclosed, make sure your policies are firmed up. At the end of the day, it’s time to take a close look at your offering documents and your Form ADV. Make sure they’re detailed enough.”

Kristin Snyder, who co-leads the investment adviser program for the Divisions of Exams, said at the PLI conference that examiners will focus on newly registered advisers and those advisers who haven’t had an exam in a while. If that’s your firm, Nelson says, “it may be time to go through a mock exam.” 

Always a little patience

Iron Road’s Rozenblit has offered 10 tips of his own. Many boil down to one word: patience. 

Private fund advisers especially have grumbled for years that Commission examiners and enforcement staff don’t understand complex business models. That may be true, but regulators don’t have to understand business models, and snapping at staff isn’t going to win you any friends, Rozenblit says. 

“The way you deal with it is upfront coaching and explaining to your staff that you will likely repeat yourself or restate the information in multiple different ways, and that’s okay,” he says. “Not to say things like, ‘I already answered that question.’”

Patience matters as you consider exams and enforcement trends, Rozenblit adds. 

“For me, it was kind of my pet peeve, when folks would focus too much on hot topics. It doesn’t really work. And it doesn’t really work because a lot of the exams and enforcement actions are looking at conduct that happened a year or two ago. For most firms, particularly most private equity firms, they only find out about hot topics when it’s too late.”