These are my notes, live from the forum. (Please pardon the rougher nature.)
Speakers:
Jason Brown, Partner, Ropes & Gray
James Gaven, Senior Counsel and Chief Compliance Officer ,Welsh, Carson, Anderson & Stowe
Byron Pavano, COO & Fund Counsel, Audax Group
Abrielle Rosenthal, Managing Director, Chief Compliance Officer, TowerBrook Capital Partners LP
The new registrant presence exam initiative is over. What’s next?
The exams are much more focused than when the presence exam started. Requests across regional offices are looking more similar. SEC personnel are getting more knowledgeable. Enforcement actions are coming.
Work hard to get documents in by the deadline or before the deadline to the SEC examiners. Speed makes you look good.
Don’t underestimate the importance of the process. Make sure you know who is going to do what. Decide who to notify. Plan on how to leverage outside counsel and consultants to help with the process.
Focus on how to use attorney-client privilege for disclosure. It does change the tenor of the exam process.
How to stay ready for an exam.
Mock audits. Maybe it’s better to have a deeper dive on specific issues than a full audit.
Grab an example of a request list and make sure you can get all of the documents.
Have a day one pack ready at all times, with an introductory presentation.
The SEC will be focused on fees and expenses. Make sure you have that information put together. Examiners are focused on the allocation of expenses between the funds and the management company. Keep an eye on broken deal expenses. Focus on employee/consultant/operating partner expenses. The SEC will be looking at a general ledger and deep-diving.
Are examiners giving credit to ADV and LPAC disclosures? It seems to be a mixed bag. You definitely can’t amend the LPA through the ADV. It won’t save you if there is an actual issue. Don’t say “may” if you are actually doing the act and always doing it.
Accelerated monitoring fees are continuing to be a hot button. It’s moving from a deficiency to an enforcement action.
You need to be accurate and full-some in your responses. You also need to make sure you understand the question. The SEC questions tend be one-side fits all. You don’t need to answer more than what is asked.
Consultant versus employee and charging to the portfolio companies. If the person is exclusive, then the SEC is going to take the default position that the person is an employee, regardless of how the firm treats the person.
Valuation is continuing to be a focus are for the SEC when examining private funds, private equity and real estate in particular. The SEC will want to see what caused changes in valuation. The focus is on good process. The SEC has hired evaluation experts. The examiners are challenging underlying assumptions. Of course, examiners are looking for documentation.
Allocation of opportunities has been a point of focus. Examiners are looking for allocations among funds and allocations among co-investors. The key is to disclose what you are going to do and to make sure you follow that disclosure. It’s okay to cherry-pick as long as that what was disclosed.
In at one exam, there was side letter in which the investor expressed an interest in co-investment opportunities. The examiners determined that that provision required the manager notify when there was a co-investment even if that opportunity was not offered to that investor.
The Custody Rule is still a tough fit for private equity firms. They are looking for thoughtful consideration of the rule.
