SEC’s Freedman offers guidance on ‘hidden’ fees

SEC examiner Nina Freedman also spoke about the need for documentation in regards to portfolio valuation.

US Securities and Exchange Commission (SEC) examiner Nina Freedman clarified how the regulatory body defines “hidden fees” while serving on a panel at The Association for Corporate Growth’s Intergrowth 2014 conference in Las Vegas on Wednesday.

In April, several news organizations reported that the SEC had established a group to examine the operations of private equity and hedge funds, which have traditionally faced less scrutiny than other investment managers. A Bloomberg report also indicated that the SEC review had found “a majority of private equity firms inflate fees and expenses charged to companies in which they hold stakes.”

When asked about the commission’s examination of ‘hidden fees’, Freedman said that those typically refer to expenses that are offset against management fees.

“Usually it’s negotiated where some percentage can be offset against management fees,” Freedman said. “There can be language that says that the monitoring fees less expenses will be charged. So we’re going to want to follow that money coming in and understand that the proper offset they calculated to those management fees.

“If it’s not a clear, easy calculation … if there’s other factors intervening, if there’s a more complicated calculation, we’re going to want to look at that because it’s what we would call a hidden fee.”

Freedman went on to compliment one GP’s plan for maintaining a dedicated allocation for those types of expenses.

“That’ll be very helpful when the SEC comes to call,” she said. “We want to look at what we would consider all the fees, including expenses – expenses to the fund, expenses to the portfolio companies, all of those charges we’re going to want to look at [at].”

Freedman also offered guidance on valuation policies of portfolio companies, which the regulatory entity has become increasingly aggressive in pursuing. Last year, the SEC charged charged two investment advisers at Oppenheimer & Co. with “misleading investors about the valuation policies and performance of a private equity fund they manage”. The SEC alleged that the advisers had presented assets as being held at a steep mark-up from where they had been valued by the underlying manager.

“If you have strong policies and procedures – and strong documentation of those policies and procedures – so you’ve been arguing this in front of an valuation committee for years and years for [each] investment. Coming in, having some discussion, hopefully getting some comments from the committee, working with auditors, working through that. If there’s a document trail of all of that, that’s going to be very powerful,” she said. “We love documents. Especially if there’s minutes valuation committee, then we really have it.

“We can’t actually be satisfied when someone tells us that they meet quarterly, we need to see it, we need to see documentation that you met quarterly and vetted these valuations.”