We’re always eager to hear how private fund managers are faring with the realities of SEC-registration. In what’s become something of a tradition, we also enjoy providing those CCOs who’ve yet to undergo an exam a sense of what may come, and offer some best practices to successfully complete the exam process. Here’s our latest five:
Inspectors have more time than you think:Whatever files you send to the SEC will be thoroughly read, or at least that’s the assumption GPs should be making when submitting documents. The SEC tells us that some firms provide what they call a “data dump”, maybe in the hope that inspectors drowning in too much paperwork won’t be able to discover deficiencies. What they prefer is GPs being more focused and concise in their responses, but will absolutely take the time to read every file as a matter of principle.
Don’t rely on the SEC’s systems:The commission provides advisers a secured site to electronically submit documents. Nifty, except the system has size limits. That’s not normally a problem, but for a GP responding to a request letter, and so needing to submit a large chunk of data at once, it becomes impossible to use. As a workaround, CCOs say they’ve ended up mailing password protected flash drives to a regional office, but admit it was a less than ideal alternative.
Reread your LPA before the exam:We’re not saying inspectors will expect you to know the limited partnership agreement cold, but one of the best ways GPs can prepare for an exam is carefully reviewing it before the interviews begin. Inspectors will ask you questions about it, and having an immediate sense of what the LPA says on, say, waterfall calculations, leaves the impression that it’s a document taken seriously and regularly reviewed.
Have an SEC alert email at the ready: After receiving that heart-pausing call from the SEC announcing its intention to subject the firm to an exam, CCOs say one of their next moves is to alert staff and partners about the news. Writing the email is a process in itself, and may need sign-off from senior staff. So what some compliance chiefs are doing is writing the email in advance (and gaining that approval beforehand), and chambering it for when the time comes.
Speak up:Believe it or not, SEC staff encourages compliance professionals to reach out and ask questions. For CCOs, that can feel like a suicide mission: “One wrong question can lead us to being targeted for an exam!” is what your common hypothetical GP would say. But SEC staff stresses that healthy dialogue between regulators and industry is necessary for effective supervision and cooperation. In that spirit, GPs with any technical questions about a rule or regulation can contact the Division of Investment Management by going here: http://www.sec.gov/divisions/investment/imcontact.htm; and any questions about the examination process can be sent to the National Exam Program’s Exam Hotline found here: http://www.sec.gov/about/offices/ocie/ocie_hotline.shtml
For more on the SEC inspection process, we invite you to read the March edition of pfm.