Tag: Charles Lerner

Conducting an Effective Annual Review

These are my notes from the “Conducting an effective annual review” session at the Private Fund Compliance Forum 2012.

Moderator:
Charles Lerner, Editor, The US Private Equity Fund Compliance Guide and The US Private Equity Fund Compliance Companion & Principal, Fiduciary Compliance Associates LLC
Panel Members
Nicholas Denton-Clark, Managing Director & Chief Compliance Officer, PineBridge Investments LLC
Kelly S. Hale, Compliance Officer, TA Associates
Danielle M. Perfetuo, Chief Compliance Officer & Counsel, Alcion Ventures
Robert E. Phay, Jr., Associate General Counsel & CCO, Commonfund

You are required to update the policies and procedures every year. That means date them.

One topic was whether to run the annual review throughout the year or all at once. Panelists came down on each side.

One panelist looked that the litigation releases to see what went wrong with other firms. That adds a perspective on whether the firm’s policies and procedures could address and prevent the problem. It’s a also a great tool to help educate business people on compliance problems.

Top Ten things to consider when conducting an annual review

  1. Utilize your risk assessment to determine focus areas
  2. Review new products or business lines and current market conditions
  3. Review results and issues raised in previous review
  4. Review top SEC deficiency and focus areas
  5. Ensure new rules, regulations and guidance are addressed in your policies and procedures
  6. Confirm conflicts of interests are addressed and/or mitigated
  7. Interview employees to assess program effectiveness
  8. Review your disclosure documents and other regulatory filings
  9. Test the effectiveness of and compliance with your policies
  10. Document your review

For new registrants, Charles recommended that you do the annual review in the fall. If it’s a bust, then don’t document the review. Then do another in early 2013, within a year of registration, hopefully with the problems fixed from the busted annual review.

The SEC does not require a written report, but it needs to be a written report. How else can you prove that you did the annual review unless there was a written report. They key is to show that you were thoughtful about the process.

What goes into the report? List everything that you looked at, what problems were discovered or changes that could impact the item, proposed changes, and follow up.

What do you do if the policy is not being followed? Depends on the rule. If it follows the SEC required minimum then you need more training. Otherwise, adjust the policy so there are fewer transgressions. For example, if your policy requires pre-clearance of political contributions and people are not pre-clearing. Maybe you remove the requirement of pre-clearance.

Allocation of expenses is a hot button for the SEC when it comes to private equity. That includes calculation of the fee.

What happens if a limited partner asks for a copy of the annual review? Don’t give it to them. If the LP is a public pension fund, that document would be subject to a FOIA request.

Most of the panelists used outside counsel as an intermediary for annual review and some forensic testing. That makes the attorney-client privilege as a defense to producing the report. If the SEC asks, it’s probably still a good idea to give it to them.

It’s a good idea to keep individual names out of the annual review so that the names don’t end up in a SEC deficiency letter.

 

 

US Private Equity Fund Compliance Companion

If you are looking for a good guide to help your private equity compliance program, PEI Media’s US Private Equity Fund Compliance Guide is a good place to start. There have been a few changes since its publication in 2010. PEI Media has just published the US Private Equity Fund Compliance Companion to provide an update on the new and amended regulations, hoping to deliver some timely information before the March 30, 2012 registration deadline.

Charles Lerner of Fiduciary Compliance Associates was the lead editor and asked me to contribute a chapter. (That means I can offer you a discount of 20%. use the code: COMP_20)

Other contributors include:

  • Daniel Bender
  • Erik A. Bergman
  • Timothy M. Clark
  • Winston Chan
  • Peter Cogan
  • Doug Cornelius
  • Karl Ehsam
  • Kimberly Everitt
  • Daniel Faigus
  • Craig Friedman
  • Thomas S. Harman
  • David Harpest
  • Ebonie D. Hazle
  • Jeanette Lewis
  • Matthew Maulbeck
  • Leslie Meredith
  • Edward D. Nelson
  • John J. O’Brien
  • James T. Parkinson
  • Scott Pomfret
  • Michael Quilatan
  • Jay Regan
  • John Schneider
  • Justin J. Shigemi
  • Kate Simpson
  • Mark Trousdale
  • Joel A. Wattenbarger

PEI’s description.

 Featuring expert advice from over 30 compliance and legal professionals, this guide for chief compliance officers (CCOs) provides practical guidance on the legal and operational issues that registered investment advisers are required to comply with, and what the CCO role entails with useful checklists and practical tips.

The companion also features an exclusive roundtable discussion among a chief compliance officer, a head of investor relations and three attorneys. In this candid and informative session, these compliance experts discuss reporting net as well as gross performance results, limitation on general or public solicitations of investors, fundraising in new markets, limited partner due diligence and social media policy – it’s a discussion that will reveal the realities of the brave new world for registered investment advisers.

You can see the table of contents and read two chapters in the US PE Compliance Companion. (.pdf)

The US Private Equity Fund Compliance Guide

One of the struggles with implementing a compliance program for a private equity fund is that the Investment Advisers Act is targeted at retail operations dealing with relatively liquid investments. Neither fits well with the private equity model of institutional investors and large, illiquid transactions. Most of the guidance and discussion about how to implement a compliance program focuses on the retail side. Given the changes coming from Dodd-Frank, most private fund managers will need to register with the SEC as investment advisers.

Private equity firms are going to need some good guides to help them out. PEI Media just published The US Private Equity Fund Compliance Guide. It is a useful resource to private equity firms putting together a compliance program.

Since it was just put together this year, the guide includes most of the new laws and regulations coming out of Dodd-Frank as they relate to private equity fund compliance. Of course, given the huge slate of rule-making in the pipeline, the guide will start getting out-of-date. You need to start sometime and the regulatory framework will continue to evolve.

Charles Lerner of Fiduciary Compliance Associates took the helm as editor of the guide and farmed out the individual chapters to a talented group of contributors. Most chapters do a great job of trying to translate the regulatory regime of the Investment Advisers Act to the realities of a private equity fund manager. A few chapters come up short. They merely tack on a paragraph at the end of the chapter pointing out that much of the preceding is irrelevant for most private equity firms or fail to provide a meaningful discussion for private equity.

Some chapters do a great job of addressing the problems that are more closely associated with private equity. The “Side Letters” chapter does a great job putting those agreement in the context of potential conflicts and the requirements of the Investment Advisers Act. I would give the same praise to the “Identifying Potential Conflicts of Interest” chapter.

Overall, I found the guide to be a great resource in helping me to craft my compliance program. My copy is already getting filled with notes and annotations. The downside it that it’s expensive: $795.

You can take a look at the table of contents for the guide and see how it fits into what you are doing and whether it would be worth the price.