I spent Wednesday and will spend Thursday at Private Equity International’s 10th annual Private Fund Compliance Forum. I’ve attended this event at least a half-dozen times and enjoy coming back.
The organizers asked that most of the sessions be off-record. I had detailed notes that I published on Wednesday, but took them down. Instead, I’ll share a few general observations.
It sounds like exams of private equity funds are down. Many regional offices are allocating exam resources to other registrants. New registrants are often getting a hello and welcome to registration message from their regional office. The Private Funds Unit is still active and examining fund managers. It sounds like the focus is on managers who have not yet been examined. The regional offices do act on tips and complaints about fund managers.
When you end up with an SEC exam, make sure you focus on the document request and try to scope it. Scoping is hard, but can save the fund manager and the SEC examiners a great deal of time. Reach out to the SEC to make sure you understand what they are looking for. The document request list often looks like a wide-ranging shotgun blast. Examiners are not looking for huge stacks of documents from smaller firms.
The SEC is stalling registrants from the EU. The concern is that GDPR will prevent the SEC from getting the information they need as part of the reporting and examination process.
There is a great deal of discussion around cybersecurity. None of the attendees indicated that they had subject to any of the cybersecurity sweep exams. Those sweeps are now in their third iteration. See: New SEC Cyber Enforcement Initiative. If you report a breach, you have increased your chances of a cybersecurity exam from the SEC.
It’s not just SEC examiners who are focused on cybersecurity. Expect investors to also conduct a fair amount of diligence on cyber.
CCOs need to stay laser focused on fees and expenses when that money comes back to the fund manager or an affiliate of the manager. If the fund documents state that a service will be provided at market rate, make sure you are conducting periodic surveys of the market rates. If the fund manager is being reimbursed for an employee’s time spent on a portfolio company, make sure you know what part of the employee’s compensation can be included in the rate. If the fund documents say salary, that means you can’t include the cost of benefits.
There was much more knowledge shared from panelists and even more shared among attendees. Plan on coming next year.
