When PFC hit NYC

Some of the key takeaways from this year's biggest bash for private fund compliance professionals.


Private fund compliance professionals gathered in New York City last week to discuss a growing list of regulatory developments and new rulemaking that already has resulted in some hours of lost sleep.

The big news, as PFM subscribers will be aware, is that the US Securities and Exchange Commission (SEC) has completed its beginner’s tutorial on private equity, and is now ready to start pinpointing areas of the business model it feels are problematic from an investor protection point of view. Top SEC inspector Andrew Bowden made an appearance at the conference on day one to say that some GPs are hiding charges like operating partner fees and automated investor reporting purchases from LP scrutiny. We cover his warnings in more depth HERE.

But that wasn't the only major news to emerge from the conference. For those of you who couldn't make it in person, here are few more headlines PFM gleaned from on-stage speakers and sideline conversations:

Tougher SEC oversight is here: As mentioned, the SEC isn’t asking GPs to explain what carried interest is anymore during presence exams. Over the past two years, the agency has got up to speed with the private equity model and now feels confident enough to call out certain areas of the industry that it feels violate the fiduciary duty registered advisors owe their investors (the vagueness of the LPA language notwithstanding). And as time goes by, examinations are getting tougher, delegates heard at the conference – meaning the chance of getting a long deficiency letter that can impact the firm’s operations in a serious way is getting higher (goodbye accelerated monitoring fees?). Even more worrying is that some think SEC examiners will begin revisiting firms cited with deficiencies to see that everything’s been addressed. This is common in other areas of finance, but as yet less so in private equity, says Jason Brown, funds partner at law firm Ropes & Gray. “I suspect that inspectors wanted to get further along in their initial presence exams first.”

Cybersecurity is a problem that isn’t going away: Another major topic at this year’s forum was cybersecurity, something the SEC plans to run a sweep on in the coming months, maybe even weeks. For starters, it seems that cybersecurity is a compliance issue like no other, in the sense that it’s always evolving and steadily creeping into new areas of life (everyone now carries small computers containing sensitive firm data in their pocket). A useful tip shared at the forum was to regularly track data movement, meaning GPs should purchase software that allows them to monitor when and where documents are downloaded and sent across divisions or offices. Doing so allows a CCO to analyze information flow in real time and identify any sources of vulnerability – something especially important when a disgruntled employee leaves or a senior manager needs reminding about not sending important work files to their personal email address.

The rise of the chief cheerleading officer: On all these matters, however, the CCO needs to be something of a salesperson in communicating the importance of compliance to senior management, delegates heard. If not, the compliance team may struggle to get the necessary funds during budget time to track the non-stop flow of legal and regulatory developments that require their consideration. One CCO in attendance said she does this by preparing monthly reports for the CEO and CFO that provide bullet points of all the various rules and regulations her team addressed that month, and how it impacts the business. Another great selling point, she says, is explaining how the CCO is becoming a bigger part of the fundraising process. Stuttering on a compliance-related question can be all that it takes for a LP to cancel a commitment in today’s competitive fundraising environment.

Didn’t make this year’s conference? We're giving you another chance to hear about all the latest industry compliance developments live at PEI’s PE/VC Finance & Compliance Forum 2014 this September in San Francisco. For tickets, click HERE.