Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit, disclosed the launch of a Private Equity Initiative in a speech on Tuesday. While speaking to the Regulatory Compliance Association, Karpati spoke about the Enforcement Division’s and in particular the Asset Management Unit’s priorities in the hedge fund space.
The Private Equity Initiative is coordination between RiskFin, the Division of Investment Management, and OCIE to identify private equity fund advisers that are at higher risk for certain specific fraudulent behavior. Karpati mentioned two behaviors that cause concern.
With Zombie Funds, managers delay the liquidation of the fund because the management fee is their only source of revenue. The SEC had mentioned back in June that it was hunting down zombie funds.
The second area is valuations. The SEC is rightly focused on valuations when it comes to private equity. The assets are inherently hard to value. Even the best valuation process will lead to an internal judgment on the value the fund. Karpati claims that the SEC uses “certain data sources” as part of the SEC’s risk analytic initiative to identify those private equity fund advisers that may be improperly failing to liquidate assets, or have been misrepresenting the value of their holdings to investors.
Karpati finished the speech by ask fund managers to be nice to examiners:
Finally, I think all investment advisers need to be alert and prepared for exam inquiries. It is important to be cooperative with exam staff while an examination takes place. It is also important to implement any necessary corrective steps if the SEC identifies violations or possible violations. Taking these steps will help the examination process to proceed more efficiently and reduce the likelihood of more formal inquiries by Enforcement or AMU staff.
I didn’t find anything new in the speech. That’s a good thing. The SEC has made it clear what they are looking for in their welcome to the SEC letter, enforcement actions, and speeches for many month now. I give them credit that it sounds like the SEC better understands the risk and compliance problems for private fund advisors in a way they did not understand 12 months ago.
Sources:
- Enforcement Priorities in the Alternative Space speech by Bruce Karpati, Chief, SEC Enforcement Division’s Asset Management Unit U.S. Securities and Exchange Commission
- Best Practices for Hedge Funds to Navigate Their Own ‘Misaligned Incentives’ by Bruce Carton in Compliance Week
- SEC Enforcement Division’s Private Equity Initiative in Compliance Avenue
- Dawn of the Zombie Funds