The worst compliance policy is one that doesn't work

Becoming registered with the US Securities and Exchange Commission would bring many changes in the way private equity firms establish and implement policies and procedures. Compliance officers tell PEM that there’s a balance to be struck in terms of how granular procedures need to be.

The private equity industry is facing a number of regulatory changes, in the US and beyond, that will change the scope of how GPs manage their firms. Just last month, the US Securities and Exchange Commission finalised rules, making registration a reality for most private equity firms. Managers will face regular inspections by the SEC, must designate a compliance officer, and explicitly outline how to deal with potential conflicts of interest, among other requirements.

One of the more granular pieces coming out of regulation is that private equity managers will have to document… just about anything that’s documentable. With that, all eyes will be on not just the policies and procedures managers create, but how they are implemented and monitored.

It’s almost worse to have a policy that is not operational than no policy at all, one chief compliance officer told PEM.  “If you’re going to have a policy, make sure you have well-developed procedures that accounting or HR or anyone whose work might have compliance-related components can follow,” said the compliance officer.

A lot of critical documentation can be accomplished through effective communication. Some private equity managers find it helpful to spend time with employees to check their procedures and ensure that the information they track and record can be easily summarised and reviewed.  “Once you do this, you can be more confident that your team is making the right compliance-related decisions and recording the right information each and every day,” said a general counsel.

Another thing to consider when it comes to implementing policies, is it’s important to make sure your policy is broad, but that procedures are more detailed.

A compliance manager told PEM that his firm is creating a due diligence check list for investment professionals. The challenge is to make sure the document is brief so they’re not turned off by it, but that it helps flag material risks.

Procedures are also key when there’s an infraction at the firm with policies needing to reflect the steps the firm took to address the problem. “You do the best training you can, but if something falls through the cracks, you aggressively follow up,” said the general counsel.

It’s important to keep in mind that if you operate in a way that is reflected in polices and documents, then that's great, but if you operate in a way that isn’t square with your procedures, that’s going to be point number one in the examiner’s report. But one thing is for sure, policies and procedures are getting more rigorous attention by authorities.