Your compliance blueprint (part IV)

One of the best ways for compliance officers to get better at their jobs is to speak with their counterparts at other firms. Swapping war stories from an SEC presence exam, say, can help CCOs better understand what the inspection process is like and how to avoid mistakes.

As regular readers of PE Manager are aware, we’ve previously shared some of these insights, tips and experiences in our “SEC compliance blueprints”, which can be found in our archives. But to help private fund managers sail through the inspection process – rather than endure months of unwanted scrutiny – we wanted to share a few more insights that we’ve gleaned from compliance professionals in the last few months:

A clean exam doesn’t always mean a clean bill of health: SEC examiners tend to conduct targeted presence exams that are limited in focus. Just as a cardiologist checking for heart murmurs might well miss a problem with your eyesight, an exam team deployed to assess valuation procedures may not necessarily flag a fee allocation issue in their comments. But it’s something that future examiners may take issue with at a later date.

Save the date: Here’s a situation no CCO wants to find themselves in: the SEC calls to say that they plan to conduct a presence exam on the same day as the firm’s annual investor conference. One compliance officer who experienced this asked if the exam date could be rescheduled – but quickly regretted that decision after learning just how firm the SEC was about its timeline. Another CCO encountered a similar response after asking whether the exam date could be moved from the day before a holiday break, when many partners would be away on vacation. Then again, other GPs have had better experiences: one firm’s CCO was on maternity leave, and examiners were sympathetic about finding an agreeable date that worked for her. In other words: asking to reschedule the exam date is not necessarily a bad question; but it does bring a degree of risk.

Integrate your CCO: As the point person for SEC communications, the CCO is best placed to instill a sense of confidence in examiners that the firm is well-managed. Compliance officers that are integrated into the various operations of the firm and are even well-versed about the genesis of investments go a long way in impressing SEC inspectors. The SEC’s in-house private equity specialist Igor Rozenblit said as much on stage during the agency’s national compliance outreach seminar last month: “When a CCO knows a lot about their business…can tell us how all the various processes works….and [doesn’t] need to schedule many meetings to answer our questions… we relax. We think this will be a smooth exam.”

Schedule some study sessions: Inspectors don’t just suddenly turn up unannounced. Usually the SEC will call to announce a presence exam scheduled at least a few days later, sometimes weeks out. While CCOs stress that compliance training needs to be a regular firm-wide exercise, this lead time be can be used to refresh the partners’ understanding of all the compliance policies and procedures. Many firms have their general counsel and/or outside lawyers participate in these study sessions, and are there to help answer questions about the firm’s compliance manual.

For more on the SEC inspection process and some coverage of the agency’s new ‘zero tolerance’ approach to compliance infractions, we invite you to read the March edition of PE Manager.