These are my notes, live from the forum. (Please pardon the rougher nature.)
Speaker:
Marc Wyatt , Deputy Director -Office of Compliance Inspections and Examination, US Securities and Exchange Commission
(Of course, his comments are his own and don’t represent the viewpoints of the Commission or the rest of the staff.) This also only his 16th day in this position.
The “presence exam initiative” was a response to the flood of new registrants coming from Dodd-Frank. The SEC wants to push the results back to the firms.
Capital formation is important. The private equity industry has grown 25% and capital raised has increased by 40% over the last few years. The size of funds currently being marketed is down 14%.
He interprets that the SEC’s oversight is not impeding capital formation.
OCIE’s private fund unit wants to conduct targeted risk-based exams to ensure compliance. The unit spreads the results throughout OCIE to keep examiners aware of risks and what to look for. The unit is also running training sessions for the large population of examiners.
Based on last year’s speech by Bowden, investors are focused on fees.
Disclosures on Form ADV does not work if the disclosure is not made until after the investor comes into the fund. Get consent if you imposing a new fee or expense.
The SEC is happy to seeing a split between the general counsel and chief compliance officer role.
There is still room for improvement.
By far the most common deficiencies noted by our examiners in private equity relate to expenses and expense allocation. Many managers still seem to take the position that if investors have not yet discovered and objected to their expense allocation methodology, then it must be legitimate and consistent with their fiduciary duty.
Co-investment allocation is an area of concern. All investors must understand where they stand.
In addition to the SEC’s focus on traditional private equity, the National Examination Program began utilizing our Private Funds Unit to systematically look at private equity real estate advisers. There was an observation that real estate managers, especially those executing opportunistic and value-add strategies, tended to be much more vertically integrated than traditional private equity managers.
They found that some ancillary services are not disclosed. More often they found that the manager would charge these additional fees based on the understanding that the fees would be at or below a market rate. Unfortunately, the SEC fund that the manager was not able to substantiate claims that such fees are “at market or lower.” The SEC saw that the managers collects no data to justify their fees at all. Other times, the data is collected informally through calls to other industry participants and is not documented.
I hope that private equity real estate managers who have promised to provide their investors with “rates at or below market rate” review their benchmarking practices to ensure they can support their claims.
We can expect additional enforcement recommendations involving undisclosed and misallocated fees and expenses as well as conflicts of interest.
The speech was published during the session. Here it is: Private Equity: A Look Back and a Glimpse Ahead.
Post-speech questions and comments:
OCIE wants to be risk-based, data-driven, and transparent. They don’t want to be a “gotcha” regulator.
How do you get the examiners out of the office faster? Give them accurate and consistent responses quickly. Don’t cross-talk. Make sure you understand the question and understand the definition/terminology. If you data-dump that will slow down the process. If you give the examiners 700 documents, they will have 700 documents to read and that takes time.
Exempt reporting registrants? The SEC will show up if there is a TCR or a sweep.
He looks at CCOs as colleagues to help spread compliance. CCO liability situations came from egregious behavior (Blackstone aside.)