On May 2, 2012, Carlo V. di Florio, the Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), delivered a speech to the Private Equity International Private Fund Compliance Forum addressing key compliance issues for private equity funds. Director di Florio noted certain areas the SEC is focusing on with respect to private equity funds, including:
- Fees and expenses
- Conflicts of interest
- Fund professionals taking on roles with portfolio companies
- Marketing materials
- Insider trading concerns
Director di Florio emphasized an investment adviser’s fiduciary duty to act in the best interests of its clients and specifically addressed fees and expenses in this context, stating that private equity advisers must allocate their fees and expenses fairly between the firm and its clients and should clearly disclose its fees and allocation of expenses to its clients. He also noted that private equity advisers should identify any conflicts presented by the type and structure of investments their funds typically make, and ensure that such conflicts are properly mitigated and disclosed.
Of the 50 largest private equity funds in the world, 37 are now registered with the SEC and 18 of these are new registrants. Director di Florio noted that the staff of the National Examination Program is identifying the unique risks presented by private equity funds and is developing information management systems to evaluate the new information collected on Form ADV and to be collected on Form PF. The SEC has a three-fold strategy: first, the staff is conducting an initial phase of industry outreach and education; second, the staff will conduct coordinated examinations of a significant percentage of new registrants focusing on the highest risk areas; and finally, the staff intends to publish reports on the broad issues, risks and themes identified.
Director di Florio also spoke about the NEP’s risk-based approach in determining which private equity funds to examine and in identifying the scope of examinations. He gave some examples of risk characteristics that the SEC tracks, including:
- Any information received from tips, complaints and referrals (TCR system)
- Any material changes in business activities such as lines of business or investment strategies
- Changes in key personnel
- Outside business activities of the firm or its personnel
- Any regulatory history of the firm or its personnel
- Anomalies in key metrics such as fees, performance, and disclosures when compared to peers or to previous periods
- Possible financial stress or weaknesses
The complete speech is available at http://www.sec.gov/news/speech/2012/spch050212cvd.htm.