It wasn’t the bombshell Drew Bowden dropped last year, but Marc Wyatt still gave the industry plenty to think about at the PEI Private Fund Compliance Forum in New York last week.
The new SEC chief inspector, still less than one month in the new job, described how a year of ‘sunshine’ has compelled GPs to update their websites, review fee and expense practices and generally talk to investors more about how the business is run. Still, he said there was plenty of work to do, including a new focus on real estate, debt and infrastructure managers, which have largely escaped the SEC’s presence exam initiative thus far.
You can read the full speech by going here. But not found there is the ambivalent reaction CCOs are having to Wyatt’s message afterward.
One talking point at the event was Wyatt’s warning that it “was reasonable to assume” more private equity enforcement cases were on the way, to which he added that many GPs still mistakenly believed a silent LP base reflected tacit acceptance of their expense allocation practices. Another was last month’s SEC case against BlackRock’s CCO, which delegates frequently cited as an example of unclear liability risks in their profession. You can imagine the feeling of anxiety in the room.
Fielding questions from the audience post-speech, Wyatt looked to ease those concerns. He urged more dialogue, noting that GPs “don’t talk to exam people enough” during inspections. He suggested misunderstandings can arise if registrants and regulators “define terms differently” or if GPs dodge questions with “data dumps.” CCOs are encouraged to talk plainly and honestly with the inspectors, in other words.
This prompted a follow-up question from the audience: “What types of circumstances do you consider when thinking of personal liability for CCOs?” Wyatt responded by saying the cases involving CCO liability were for particularly “egregious behavior”. He then scanned the entire room and said: “We look to you as our means of help.”
Wyatt and his colleagues are right to do so. But considering his earlier warnings, there is also understandable hesitation among CCOs to begin speaking more freely with inspectors. A statement that half the industry is failing to handle fees and expenses the right way, as Bowden made it last year without providing further guidance, can seal lips quickly. All the more reason for the industry to take Wyatt’s transparency message to heart and enter into close dialogue with the regulator.
Delegates at the conference also heard that progress is already being made. Industry groups, including those formed by the ACG and PEGCC, are regularly speaking with SEC officials about their concerns. April Evans, the CFO of Monitor Clipper Partners, issued a call at the forum for others to take part also.
Wyatt’s main point after his speech was that registered advisers should feel comfortable about requesting guidance and clarity from the SEC, and also about giving feedback when it was falling short in these areas, without concern of being targeted for an exam. At a time when the SEC says more enforcement cases are coming, it’s a message worth heeding.