Compliance and Regulatory Services (CARS) Hot Topics for June 2015
June 11, 2015
For this monthly distribution, we are highlighting a speech by Marc Wyatt, Acting Director of the SEC’s Office of Compliance Inspections and Examination (“OCIE”) after Andrew Bowden’s departure. Mr. Wyatt re-emphasized OCIE’s staff focus on private equity fund managers’ allocation of expenses to the funds they manage by looking back at prior results of the private equity fund presence inspections. He further mentioned how OCIE used the National Examination Program to look at adjacent assets by taking a thematic review of private equity real estate funds. These opportunistic value added strategies are more vertically integrated because the fund adviser also provides or arranges other related types of services, such as property and construction management, valuation, leasing and loan services for a fee. The SEC’s concern is that many of these fees are passed along to the fund either directly or by charging the portfolio companies without proper disclosure. These managers have also been charging back the cost of their employees who provide asset management services and the cost for in-house legal services. The result of these examinations have revealed that at times these ancillary services are indeed not disclosed and when they are disclosed the manager represents that they are provided at below market cost without performing a valid market cost analysis. Mr. Wyatt also explained that additional enforcement action will be forthcoming from presence exams but it takes time as there is a natural lag between examination and enforcement, as the SEC want to be sure it makes thoughtful and informed decisions prior to moving ahead. After laying out past findings, Mr. Wyatt provided a “Glimpse Ahead” by saying that OCIE’s Private Fund Unit is or will be undertaking exams of real estate private equity advisers, credit advisers, and infrastructure and timber advisers to mention a few.
Our Take: We cannot stress enough the importance of maintaining rigorous compliance policies and procedures to address actual and potential conflicts of interest. In fact, Mr. Wyatt supported this position by mentioning that many of the areas of conflict the SEC is looking into may not necessarily be problematic for a private fund adviser as long as the adviser has policies and procedures that are designed to address conflicts.
(Complete Listing: http://www.finra.org/Industry/Regulation/Notices/2014/index.htm)
FINRA Rule Filings List
(Complete Listing: http://www.finra.org/Industry/Regulation/RuleFilings/2014/index.htm)