Tag: Private Fund Compliance Forum 2012

A New Era of Fundraising and Marketing

These are my notes from the a New Era of Fundraising and Marketing session at the Private Fund Compliance Forum 2012.

Panel Members:
Julia D. Corelli, Partner, Pepper Hamilton LLP
Kurt A. Krieger, Legal Director, Huntsman Gay Global Capital, LLC
Jason Ment, Partner, General Counsel & Chief Compliance Officer, StepStone Group LLC
Helane L. Morrison, General Counsel & Chief Compliance Officer, Hall Capital Partners LLC

False advertising is prohibited, regardless of whether your firm is registered. Puffery and misleading statements are prohibited. Until the JOBS Act’s new rules go into effect, a registered adviser cannot advertise or generally solicit. Facebook, twitter and bulk email is bad. You need a existing, substantive relationship before contacting someone to solicit a commitment as part of fundraising.

Testimonials are bad. You can’t have friends say great things about you in advertising. It’s not just testimonial about the investment manager, but testimonials about the portfolio companies. The panelists shared stories of SEC deficiency letters that specifically dinged managers.

Deal lists need to be based on objective criteria that does not skew the results. You can’t have a bad pattern.

You need disclosures that past performance is not an indication of future performance.

Performance numbers need to be net numbers and not gross numbers. None of the guidance is tailored to the private equity space where calculation of performance is very idiosyncratic.

The SEC has indicated that exams will be focused on performance information in marketing materials. That points right at the valuation issues behind that performance.

Political contributions are a hot button. If you are going to solicit state or local pension funds, you need to limit political contributions to certain candidates and the political parties in that state. There are also state and local lobbying rules that could apply. See California for example that makes certain internal people fall into the statutory definition of lobbyist.

Summary, all marketing materials should be approved by compliance before being set free into the wild.

The panel expressed some concern that the JOBS Act changes may not be as simple as deletion of the ban on solicitation and advertising.

When using benchmarks, it’s important to use appropriate benchmarks. You can’t be misleading. It needs to be an apple to apple comparison.

You need to be cautious when communicating with investors during a fundraising period. If it could be used to entice the limited partner to invest in the next fund, it could be considered advertising and subject to the marketing limits.

Insider Trading and Restricted Lists

These are my notes from the “Insider trading and restricted lists” session at the Private Fund Compliance Forum 2012.

Two items affect insider trading: federal securities law (10b5) and a firm’s code of ethics under the Investment Advisers Act.

The panelists do not circulate a restricted list. The SEC will ask for the restricted list and ask employees if they know where the restricted list.

Given your firm’s profile, you can tailor the restrictions to the profile. The SEC does not have specific limitations.

It is important to use the insider trading list to explain why companies end up on the restricted list.

It’s also important to get companies back off the restricted list. If you signed a Non-Disclosure Agreement you need to at least respect the term of the NDA. If you lose the auction, then wait for the deal to be announced. Review the list on a regular basis to make sure it stays up to date.

What about extending the code beyond employees? Most of the panelists extend the restrictions to any relative living in the household.

If you are using paper statements, mark on the statement that you reviewed the statement. Date and initial works. Also put a check mark next to the trades shown on the statement indicating your review.

The panel also spent a fair amount of time discussing expert networks. Paying any individual for information could make them an expert network. Keep in mind that the new STOCK Act that prohibits Congressional trading also creates a duty of confidentiality when it comes to Congressional actions and makes more legislative information gathering subject to insider trading limitations.

Policies need to be reasonable designed to prevent violations of the federal securities laws.

At a minimum you need to do what you say you will do, even if that may not be enough. Document decisions and discussions about trading decisions.

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.

 

 

Keynote interview – Working with the SEC

These are my notes from the “Keynote interview – Working with the SEC” session at the Private Fund Compliance Forum 2012.

H. David Kotz, former Inspector General, Office of the Inspector General, United States Securities and Exchange Commission (2007-2012), currently Managing Director, Gryphon Strategies, interviewed by Lois Towers, Principal, Pantheon Ventures

Discussed the Madoff debacle at the SEC. His take was a failure of competence, but Madoff played different examiners in different offices against each other. He does think the SEC has learned its lessons from the failure.

As a result of Madoff, examiners are a bit nervous about failing to catch a bad guy. They take longer to close out cases and issue more deficiency letters.

He recognized that the SEC is in a political vice grip. The Democrats pushed more responsibilities on the SEC under Dodd-Frank. The Republicans failed to give the SEC any budget to tackle the additional responsibilities.

Kotz stated that there are varying levels of competency in the SEC. There are some tremendous, smart, hard-working individuals. But it’s hard for the SEC to weed out under-performing employees.

Kotz gave lots of credit to Carlo di Florio and his new approach to examination. He is concerned that it will take lots of time to move a big bureaucracy like the SEC.

He thinks that examiners get rewarded for finding stuff in exams. Lots of no deficiency letters is an indication that the examiner is just missing the issues, not that there is a lack of issues.

His view was clearly a cynical view of the SEC. He admitted as much.

Mock Audit: Successfully Maneuvering Your Way Through an SEC Exam

These are my notes from the “Mock Audit: Successfully maneuvering your way through an SEC exam” session at the Private Fund Compliance Forum 2012. These are my raw notes, so please excuse the typos and rambling.

Moderator: 

Panel Members:

There has been a dramatic increase in the SEC’s understanding of private equity and private fund managers. They are developing the internal expertise and understand the business and risks of the business. Of course, it depends on the individual examiner.

It’s a good idea to give them an introduction to the business. You can help frame the exam and their focus. It’s great to run an introductory message to the SEC. You can share the operations, investment strategy, key personnel, and risks.

There has been a push by the SEC headquarters to standardize the exam process. Historically it varied dramatically from SEC Regional Office to Regional Office. The first level of standardization is the document request letter. It has largely been standardized across the country.

An exam can last from a few days to several months. It depends whether they actually come to the office and the type of exam.

The SEC will contact limited partners. As part of the asset verification program, the SEC will compare the firm records to the account records.

How can a firm prepare for a SEC exam?

You are never going to be fully prepared. You are always going to get a deficiency letter. You need to show your compliance program. At least show that you are trying.

One panelist recommended Bates stamping all of the documents. Always keep a duplicate copy and inventory what you give them. One panelist shared an anecdote that a client received a deficiency letter for not delivering a requested document. Even though the client thought they had deliver it, the client had bad records and could not prove that they had given it.

Will an exam address issues for things that occurred before registration? The SEC will likely start from the registration date. If you have the records and information for pre-registration and readily available, then give it to them. If it’s hard, then push back.

Be scrupulously honest. Covering up a problem will often be worse than the underlying problem.

Cooperate. Don’t say no. Try to find what they are looking for and a different way to deliver it or otherwise address the concern.

Do confirm that the exam request came from the SEC. There have been cases of impersonation.

Find a model request list and try to produce all of the information as quickly as possible.

It’s good to have counsel involved in the SEC exam. However, too much lawyer involvement can be a red flag to the SEC. The CCO should always be in the room during an SEC interview.

Make sure you have a point person for the SEC. Best that it be the CCO, but if not available make sure someone else is.

Take time during the day to stop in and ask the examiners if they are getting everything they need and if they are missing something.

Take advantage of an exit interview with the SEC examiners.

Often the SEC examiners will send a draft of the deficiency letter for comment by the firm. You have 30 days to respond to the deficiency letter.

Historically, the typical routine exam will result in a deficiency letter 95+% of the time. The no action letter comes in only1% to 3% of the time.

The most common deficiencies are disclosure issues in the Form ADV, marketing issues, Code of Ethics issues, and the compliance program itself.

Side letter compliance is something unique to private funds.

 

The Role of Social Media in the Compliance World

These are the speaking notes from this session at PEI’s Private Fund Compliance Forum 2012.

Panelists:

  • Me
  • Gerry Esposito, Managing Director, CFO & CCO Newbury Partners LLC


Audience Polls

  • Registered with the SEC as investment advisers?
  • How many just registered in the last few months (been Dodd-Franked)?
  • Also registered as broker-dealers?
    (We are not covering FINRA Rules)
  • Retail customers as well as funds?
    (Rules on Supervised persons)

Social Media and Fund Marketing

Investment Advisers Act

  • (Assuming most of the audience is recently registered) the Investment Advisers Act permits marketing and advertising, as long as it is not fraudulent, deceptive or manipulative.
  • Not going to address the SEC rules in advertising in any detail.
  • Assume that publication of information through social media is likely to be considered advertising.


Rule 506

  • Even though advertising permitted under Advisers act, sales of LP interests in your funds are subject to the private placement rules. That means private and no “general solicitation or advertisement.”
  • Twitter, Facebook, or blog posts mentioning your fundraising could violate the ban and blow your private placement.


JOBS Act

  • Orders the SEC to lift the ban on general solicitation and advertisement.
  • July 4 deadline for the new SEC rule revising the Rule 506 limitation
  • Also says the ban should apply to all federal securities laws so the nonpublic limitations under IC 3(c)(1) and 3(c)(7) should also be raised


You can, but should you?

  • Expect to attract investors through social media
  • Expect to source deals through social media
  • Examples:
    • Fred Wilson of Union Square Ventures,  A VC blog: http://www.avc.com
    • Beacon uses Facebook and Twitter for retail property level marketing
  • SEC use of social media – Use twitter to send out updates.

Fraud

  • First SEC case involving IA and social media was Anthony Fields
    http://www.sec.gov/news/press/2012/2012-3.htm
  • Used LinkedIn to make multiple fraudulent offers of fictitious bank guarantees
  • That uncovered lots of other deception

Social Media and Employees

SEC Rules

  • SEC National Examination Risk Alert – Investment Adviser Use of Social Media
    http://www.sec.gov/about/offices/ocie/riskalert-socialmedia.pdf
  • Ban on testimonials
    • Linkedin Recommendations could act as a testimonial
    • Facebook Like button could be considered a testimonial
    • Re-tweeting – is it an endorsement of the message


Recordkeeping Requirements

  • SEC’s recordkeeping requirements are media neutral, so social media is subject to the SEC’s recordkeeping requirements.
  • Unlike email, records are in the cloud and subject to the whims of the platform. They don’t care that you have recordkeeping requirements
  • Third party provider to capture if need to meet record keeping
  • If marketing – need to keep a copy for six years. If sent to 10 or more people
  • If investment advice to a client – need to keep a copy for six years. Not applicable to funds.


Social Media and General Employment Issues

  • NLRB rulings
    • limits ability to discipline employees  for comments made on social media.
    • Example of complaining about company on Facebook – company was wrong to fire
  • Respect of confidentiality
  • Conflicts with fund communications to investors

 

 

Improving your compliance program through the use of technology

These are my notes from the Improving your compliance program through the use of technology session at the Private Fund Compliance Forum 2012.

Moderator: Graham Winfrey, Staff Writer, PEI Media
Panel Members:
Jeff Faber, Chief Financial Officer, Trafelet & Company, LLC
Stephen Marsh, Founder & CEO, Smarsh
Scott Ring, General Counsel, Bessemer Venture Partners

Based on an audience poll, only 10% are archiving and monitoring employees’ use of social media. A surprising number were looking to cloud computing as a viable option for storage.

Any repetitive function is a good candidate for a technology solution. Can it create efficiency and create value? A manual process can limit the access to information, not just take extra time.

One panelist uses Salesforce to have employees input conflicts and other compliance reporting information.

Technology for Form PF? Depends on your reporting level. If you are big and have to report at the high level of reporting then yes, you will need technology. There are some players that claim to be able to integrate with your data warehouse to help with reporting. This is still an evolving area.

The biggest mistake a company can make when it comes to record-keeping is to do nothing. A panelist pointed out that it is important to understand the differences between archiving and back-ups.

It is important that IT understand the compliance requirements. It’s important to test the message retrieval system to make sure you can quickly produce the records.

There is plenty of cheap technology that compliance can use that saves time and can replace manual processes. In 2012, technology is relatively cheap. On the other hand, you want to be careful of a proliferation of tools, especially those outside the firm’s servers and physical boundaries. You still need to comply with the SEC record-keeping requirements.

The issues around mobile devices have not changed recently. The issue is that the mobile devices are able to hold more information and applications. The biggest concern is losing a device that is not fully secure if lost.

How does a company monitor social media? That depends on policy. You can always block access and monitor website usage. It gets more challenging when it comes to “supervised persons.” Social media lives in the cloud that does not give you the right to access. One solution is to put a proxy in between users and a social media site. The other option is to use an API that pulls information from the sites. The third is just relying on an application on computer or device. You probably will need to rely on a combination of technologies to meet their compliance demands.

Firms will first need to balance the use of social media and the risks associated with them. It may be best for fund managers to not use social media. Employee education is key.

Policy AND technology is key. Even banning the use of social media, you need to check compliance. Employees amy inadvertently say something through social media.

(I left before the end of the panel. I had to get ready for my panel.)

Update on the new regulations and how they will impact you going forward

These are my notes from the “Update on the new regulations and how they will impact you going forward” session at the Private Fund Compliance Forum 2012. Excuse the typos and rambling nature. They are just my raw notes.

Moderator:

  • Karen Barr, General Counsel, Investment Adviser Association

Panel Members:

  • Jason E. Brown, Partner, Ropes & Gray LLP
  • Jason Mulvihill, General Counsel, Private Equity Growth Capital Council

Form PF

Should you be thinking about Form PF now? Depends. The reporting deadlines and substantive information varies depending on the type of fund and the size of the fund. If you filled out 7B1 in the Form ADV Part 1 then you need to file a Form PF.

Distinguishing between a hedge fund and private equity fund is a key to the reporting. It’s very technical. Can you charge a carry based on unrealized gains? Can you sell short? You may be a hedge fund. If you have different types of funds, you could be consolidated together to be a large hedge fund and have increased reporting obligations.

Good news. The filing of Form PF no longer has the “signing under penalty of perjury standard.” The SEC realized it’s more of an art than a science.

Focus on section 16 that asks for characterizations of investors. The SEC has made it clear that you need to gather the information on investors starting in March 2012. This is for new fund raising and transfers.
Is the Form PF information confidential? Supposedly. SEC says it will be confidential. Congress will have access. You can avoid listing the name of your fund.

Volker Rule

We are still waiting on the final wording of the Volker Rule. The Devil is in the details. The rule could limit the types of investors in private equity firms and limit the amount an investor could commit to a fund. There is lots of crafting going on. The final rule could be materially different from the proposed rule. There is a statutory compliance deadline starting on July 21, 2012. How do you become compliant with a rule that does not yet exist? Lots of uncertainty. Wait and see.

Incentive Compensation Rules

Section 956 of Dodd-Frank requires some disclosure and rule around executive compensation. The regulators issued a proposed rule. Firms will need to disclose compensation structure to regulators. Not the dollar amount, but how the compensation is calculated. Firms will need to analyze whether the compensation resulted in increased risk taking.

The level is $1 billion of asset. Not assets under management, but assets on the balance sheet. That would seem to exclude most private equity fund managers. You should expect some more clarification under the final rule. The proposed rule works well for banks, but gets murky when applied to fund managers. Look at question 1.O on Form ADV. If you checked that box, you are subject to this rule.
There is some concern that carried interest could be pulled into the 3 year holdback requirements under the proposed rule. That would seem strange since the carried interest has already been subject to a realization and usually lengthy investment period.

Treasury Regulations

There are treasury forms that have been on the books for years that nobody fills out.
Form SLT is the new form and the Treasury has used that as a tool to make firms aware of the other forms. Form SLT is based on foreign investments. The form is looking for more than $1 billion in foreign investments and more than $1 billion of foreign investors. There is an exclusion for direct investments.

Form S is also there for foreign investments and foreign investors. Add in Form SH.

BEA filings come out of the Department of Commerce, but Treasury helped publicize it. The BEA form is triggered if you own more than 10% of a foreign company. It requires lots of information. (The instructions say it will take 84 hours to complete the form and are required quarterly.)

FBAR is if you have control over a non-US account. Fortunately, it’s a short form. Add in FATCA and the proposed rules coming out on reporting for foreign accounts.

CFTC Regulations on swaps

The CFTC definitions are very broad. Trading even a small amount of commodities pulls you into the definition of a commodity fund. Dodd-Frank includes swaps into the definition of a commodity. The rules are not final yet. However, the CFTC has begun changing lots of other rules that get affected by the change in definition.

The CFTC has removed the broad exemption if you had all sophisticated investors, analogous to 3(c)(7). The other common exemption is a de minimis exemption. The broad exemption has been eliminated. There is a December 31, 2012 deadline for compliance. It’s tricky because a swap is not yet a commodity. There are lots of interpretive issues.

If you register as a commodity pool operator do the rules harmonize with the SEC’s investment adviser rules? No. The NFA (equivalent to FINRA) requires lots of information.

If you can fit under the de minimis exception, there is an annual filing requirement. For most private equity firms, you should be able to meet the de minimis exception. The threshold is 5% and 100% notional. The biggest footfall is likely to be hedging a credit facility before there is much investing.

JOBS Act

What happened? It was surprise that there was such bi-partisan support for this bill.

The law repeals the ban on general solicitation and advertising. This is still subject to SEC rule making. Don’t start advertising yet.

Keep in mind that two of the SEC commissioners sent letters to Congress that they were opposed to the bill and may take a harsh view in implementing the rules.

The change to 12(g) raising the limit of holders of record above 500 to 2000 allows for bigger funds. Although it be unusual to have a private fund with so many LPs.

Best practices for addressing anti-corruption issues

These are my notes from the “Best practices for addressing anti-corruption issues” session at the Private Fund Compliance Forum 2012.
Moderator:

  •  Douglas N. Greenburg, Partner & Vice Chair of the Global Litigation Department, Latham & Watkins LLP

Panel Members:

  • Edina Cavalli, Director, Global Head of Private Equity and Principal Investments Compliance, Barclays
  • Paul Golding, General Counsel, Citi Infrastructure Investors
  • Kelly Nash, Compliance Counsel, General Atlantic
  • Paul Winters, General Counsel & Chief Compliance Officer, Denham Capital

There are continuing challenges. Sure, the DOJ has recently lost a few cases and the Chamber of Commerce keeps pushing for FCPA reform. But FCPA will continue to be an enforcement priority.

Its not just a US law, the UK Bribery Act is probably more stringent, depending on enforcement. You also need to be aware of other local laws.

On the front-end, you should focus on the anti-corruption issues for the target. However, you are unlikely to be able to do a deep dive into a target’s finances. At least, you should look for red flags associated with the target.

  • Do business with a government official?
  • Partly owned by government official?
  • Engaged in an issue with history of corruption?
  • Does the business operate in high risk countries?
  • What do their procedures and controls look like?

One view is that in acquiring a portfolio company, someone from the private equity firm may end up on the board of directors for the company. That means potential libaility for serving on the board of company that commits violations of the FCPA or Bribery Act. That gets the attention of senior people at the firm. Everyone hates personal liability.

A key is documenting that you focused on the issues and what you did. If you can;t actually unearth bribery, you want to at least show that you conducted a reasonable amount of due diligence.

Personal libility is a concern. Business risk a bigger risk. If someone is engaged in bribery, they are engaged in illegal activity and may be involved in other shortcuts. Reputational risk is problably a bigger risk. The taint of corruption could severly impair the firm’s ability to sources and exit deals.

The tone for the portfolio company is set during the diligence phase. You are letting the target know that anti-corruption is important and will continue to be a focus post-acquisition.

Require management of acquired firms go through anti-corruption training. Do it even if the firm has an exisitng program. Get certification from top executives regarding bribery and corruption. Do you micro-manage the portfolio company?You need to let them know that you are concerned. Certainly, you want to make sure the fund management involved with the portfolio company is aware of the issues. Surprise audits are a great idea, but may be hard if you only have a minority interest.

There was a stern warning about the extra-terratorial reach of the UK Bribery Act. It also reaches beyond political bribery to commercial bribery. You also don’t need to have bad intentions. You should focus on your gifts and entertainment policies. Adapt the policies to facts and circumstances of the giving and the fund’s lifecycle. Could it look like you are trying to buy business. What is lacking under the UK Bribery Act is a history of enforcement. You don’t know what they are looking for and what they are going to do when they find bad acts.

Who should be doing bribery due diligence? Compliance or Acquisition teams? Both. Although it’s likely to end with compliance.

 

A view from the SEC

These are my notes from the “A view from the SEC” session at the Private Fund Compliance Forum 2012.

This session will provide you with in-depth analysis of how the SEC is dealing with new registrants. SEC officials will answer your most pressing questions to help you ensure an efficient compliance program.

Carlo V. di Florio, Director, United States Securities and Exchange Commission, Office of Compliance Inspections and Examinations interviewed by Nicholas Donato, Editor, Private Equity Manager

Mr. di Florio started off with some post-registration statistics:

  • 3100 private funds with 8 trillion dollars in the funds.
  • 4000 registered private fund advisers
  • 37 of the 50 world’s biggest private equity fund managers are now registered.
  • 48 of 50 world’s biggest hedge fund managers are now registered.

OCIE is working on a letter to the industry this summer on what it means to be registered and what is the SEC expected. OCIE is getting ready to do targeted inspections this fall on new registrants. After the examinations, OCIE plans to come back and let the industry know hwat tey found as the biggest concerns and what the industry is doing well. OCIE wants to share information so that compliance can do a better job.

OCIE has been focused on getting new examiners with specific skills in the industry. They want real world insights, not just general examiners. OCIE wants to know where the risks are.

What makes the SEC happy?

  • The firm has the talent and understanding of what it means to be registered.
  • The firm has the tone at the top and acceptance from senior management. That also means the resources.
  • They want to see the compliance to be tailored to the firm and training focused on the individuals in the firm.
  • OCIE wants to see some good monitoring and testing.

Performance advertising is a hot button. It needs to fairly disclosed and fully disclosed.

Some things that are unique to private funds. Fees and expenses are a critical area. Throughout the life cycle of the fund. He noted that some funds seem to be extending their duration merely to keep collecting fees.

(Mr. di Florio seemed to be well versed on how private funds work and the issues specific to private funds. It sounds like the SEC has quickly gotten up to speed on the issues particular to to private funds and how they operate differently from retail investment advisers.)

OCIE has a solid focus on senior management. They want to see the firm’s view on complaince and want to reinforce that compliance should be important to the firm.

Culture of compliance includes asking the CCO if they have the resources they need.
Mr. di Florio surprisingly noted that compensation is an important part of the culture of compliance. Paychecks are critical decision points.

Will the SEC be visiting exempt, reporting advisers? (VC firms and mid-sized private fund managers) Yes.
How to get the SEC out the door as quickly as possible?

First, figure out why they decided to come. They are staying away from routine regular checklist exams and doing mostly risk based focused exams. When they show up or announce the exam, ask the examiner why they decidded to spend their time with your firm. Tips, complaints, and referrals is a common source. This has been beefed up in recent years. (Post-Madoff) Tips, complaints, and referrals are also a way for the industry to self-police. Another source is the whistleblower program under Dodd-Frank and the financial incentive for whistleblowers.

Once they arrive. They are going to dive into the area of risk that brought them to the firm. Be prepared. Have the documents ready. Have the people available to talk with the SEC examiners. Some of the biggest impediments are waiting for documents and waiting for people to be available.

Valuations is a focus for OCIE when looking at private equity. In particular is the use of valuation in performance advertising and fee calculation.

How can the CCO let the SEC know that they do not have enough resources? (Passing notes saying “HELP ME”?) THe SEC will have its own point of view and has a broader view of the industry and what is expected of the CCOs in the industry. SEC an be an amplifying voice. They want to support the CCO, not undercut the CCO.