SEC’s di Florio steps down

The head of the SEC’s national exam program, Carlo di Florio, has revealed plans to leave the agency just one day after addressing delegates at the PEI Private Fund Compliance Forum in New York.

Carlo di Florio gave what is likely to be his last speech as director of the SEC’s Office of Compliance Inspections and Examinations to a group of delegates at the PEI Private Fund Compliance Forum in New York City on Wednesday. 

In a statement, the SEC said di Florio will depart later this month to lead a new division of risk and strategy at the Financial Industry Regulatory Authority – a group that may supervise the private equity industry if the government decides to shift oversight powers from the SEC to a self-regulatory organization (or SRO). He will be replaced by Andrew Bowden, the OCIE’s current deputy director. 

During an onstage interview with PE Manager, di Florio gave a progress update on the SEC’s initiative to examine newly registered private equity firms. That initiative began last October, when Bowden sent a letter to all new registered investment advisers. The letter detailed the OCIE’s plan to review high risk areas in the industry, including marketing materials, conflicts of interest and valuation. 

di Florio

The SEC hopes to examine at least one quarter of all new advisers by the time its presence exam initiative is completed some 18 months from now, di Florio said. Following that the SEC will conclude the initiative by issuing one or more risk alerts, or other after-action reports, most likely by the end of 2014.  

As of January 2013, there are approximately 4,020 investment advisers that manage one or more private funds registered with the commission, of which 38 percent (1,521) registered since the effective date of the Dodd-Frank Act in July 2011. To meet its objectives, the SEC would need to launch 380 presence exams, a goal made easier if the commission’s proposed budget is approved, which would result in the hiring of as many as 250 additional examiners. 

Despite the need for more examiners, the agency is thus far hitting its marks. Since last October, the agency has initiated 145 presence exams, the overwhelming majority of which have been of private equity and hedge fund advisers, PEM has learned. It is understood that 58 of those exams have been completed, and 87 exams are currently open. The average lifecycle of a presence exam is currently under 65 days and the split of hedge fund exams to private equity exams is very roughly 60/40. 

At the conference, di Florio noted that, at times, staff from the SEC’s division of enforcement will accompany inspectors on exams. This however was not common practice, and typically done for training purposes or to have a specialist from the enforcement division provide industry expertise to examiners. 

Delegates also heard di Florio praise the industry’s attitude towards compliance, noting the rigor of a large majority of registered firms’ compliance programs. However, gaps still remain, said di Florio. Specifically issues around custody, and the potential for mid-size firms in particular to be in violation of broker-dealer rules, was flagged by the outgoing head of the OCIE. 

In a statement di Florio, who was appointed director of the OCIE in January 2010, said that “it has been a great honor and privilege to serve alongside such a talented and dedicated team of exam professionals, who work tirelessly to protect the investing public and our markets by monitoring risk, promoting compliance, preventing fraud, and informing policy as the eyes and ears of the SEC in the field”.

Recently appointed SEC chairman Mary Jo White praised di Florio for his contributions to the agency, stating: “Under his leadership, the program recruited experts, implemented risk and quantitative analytics units, deployed new technology and strengthened industry risk governance practices. [di Florio] also has shown tremendous leadership in strengthening partnership and coordination among regulators nationally and internationally.”