The Watchdog Won’t be Sleeping

Updated on: July 6, 2022

April 11 2018
New York, NY

Private equity will remain high on the list of the SEC’s exam priorities this year, with a high focus remaining on fee and expense allocations and firms that have yet to be examined.

With election of President Trump, there was the hope of regulatory relief across industries, including private equity, but the reality is the SEC remains diligent during exams and is showing willingness to take enforcement actions.  Private equity remains firmly in their focus, according to the SEC’s 2018 exam priorities.

When the SEC’s Office of Compliance Exams and Inspections (OCIE) announced in February their exam priorities for 2018, they mentioned continued review of fee and expense allocation across private equity funds, and ensuring review of never-before-examined investment advisers or those that haven’t been examined in some time. The SEC also has a sharp focus on RIA’s anti-money laundering efforts, cybersecurity and protecting retail investors.

As recent settlements with private equity firms illustrates, private equity remains firmly in the SEC’s circle of priorities, with a specific focus on costs of investing, including fair expense policies, accurate disclosures in LPAs and precision in fee and expense calculations.

Because public employee pension funds invest in private equity funds, the SEC views those employees as retail investors, and therefore in need of protection. In the announcement, the OCIE mentioned of key concern was “private fund advisers that manage funds with a high concentration of investors investing for the benefit of retail clients, including non-profit organizations and pension plans.”

Industry lawyers stress that GPs should stay vigilant in monitoring that fees and expenses are handled as the fund documents dictate. They stress that conflicts of interest, as they relate to the proper allocation of fees and expenses, are clearly part of this focus as well.

For those firms that have not been examined before or that have not been reviewed in some time, the SEC is seeking to ensure that those deemed to fall in these two categories are reviewed on a risk-based approach.  Historically, private equity firms have been determined to have elevated risk profiles compared to other advisers.

Cybersecurity continues to be a top SEC priority. The OCIE explains: “We will continue to prioritize cybersecurity in each of our examination programs. Our examinations have and will continue to focus on, among other things, governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.”  Accordingly, your fund administrator should be able to easily evidence compliance with the SEC’s cybersecurity policies.

Read the SEC release here:

Published on: April 11, 2018

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