Your compliance blueprint (Part III)

Buzz continues to build around comments made last month by the US Securities and Exchange Commission’s (SEC) top private equity enforcement chief. Speaking at the 2013 PEI CFOs and COOs Forum in New York, Bruce Karpati told delegates that “it’s not unreasonable to think that the number of cases involving private equity will increase”. 

PE Manager covered Karpati’s on-stage interview here, noting that the agency was educating itself on the complicated world of private equity to better police the asset class in the future. 

We’ve previously provided tips for fund managers to help prepare for inspections and avoid SEC enforcement action; those ‘compliance blueprints’ can be accessed here and here. But following on-stage discussions and sideline interviews at the forum, we’ve collected some more key take-aways and pointers: 

Keep your lawyer behind the scenes: It can be tempting to have legal counsel sitting by your side during questioning from inspectors, but assuming there’s no threat of an enforcement action, that can be a mistake. Legal sources say their presence can be interpreted as a defensive measure by inspectors, which can set the wrong tone during an on-site examination. Instead keep the firm’s legal advisors on stand-by in the event they’re needed. When possible, provide your lawyer regular feedback on the types of questions being asked and to whom. 

Third-parties get the third degree, too: Don’t be spooked if at some point during an assessment the SEC fact-checks some statements with the firm’s auditor. Delegates said it wasn’t uncommon for inspectors to try and better understand the audit process by speaking with auditors themselves weeks after the on-site visit is concluded. 

Disclose, disclose, disclose: One major area of focus for examiners has been what material conflicts the fund discloses to investors. Be upfront about how everything from travel expenses to failed deal costs will be paid for by the fund, management firm or mixture of both. During his interview, Karpati said that a firm “disclosing the conflict to the LP advisory committee — or better yet, having it vote on the conflict — goes far in demonstrating good faith”. 

Embrace the power of PowerPoint: In our last compliance blueprint we said it made sense to provide inspectors an overview of the firm in the beginning stages of the examination. Some compliance officers have done just that by including a PowerPoint presentation explaining the firm’s structure and operations at the time when the SEC makes its initial document requests. Unlike other materials on hand describing the firm’s scope and strategy, the PowerPoint presentation should be 10 to 15 slides designed to help inspectors better understand the nuances of private equity (and its differences to hedge funds) which can be of significant aid to industry outsiders. 

Expect pre-registration info requests: It’s not yet been a year since hundreds of private equity firms came under the SEC’s watch, but that hasn’t stopped examiners from requesting PPMs and other governing documents from funds launched long before then. Legal sources advise GPs to err on the side of transparency with information requests, but caution inspectors may need to be reminded that pre-registration funds did not have to meet rules now applicable to post-registration funds. 

As before, good luck. Not that you'll need it of course.