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Private Equity: What To Expect from Regulatory Policy Moving Forward

The current and future state of regulatory policy:
The SEC’s enforcement actions in recent years have indicated a clear direction of their regulatory policies. While it has been speculated, and one could imagine the current administration taking a step back and assuming a less strict role, the call from limited partners (“LP”) for greater transparency and disclosure has resonated and is here to stay.

The new regulators:
LPs have, in a sense, become the ‘new regulators.’ LPs have welcomed the SEC’s mandate of disclosure and managers have taken notice.  Investor requests are mirroring those of the regulators, and their response to increased transparency through quantitative, active communication has resulted in positive feedback and more eager response during the fundraising process.  The approach of regular, ongoing (proactive) communication vs. a ‘last resort’ (reactive) approach has become a core value respected by investors. Regardless of any changes to policy, it’s safe to assume that a new bar has been set.

Document, document, document:
Whether an advisor is SEC-registered or has plans to register at a later date, keeping compliance in mind while designing and implementing their policies and procedures is crucial, especially as it relates to fees and expenses. A valuable exercise is to design policies and procedures from the perspective of someone looking in, and approaching this process initially as if one is registered has been shown to make the process of registration less arduous when the time arrives.  Documentation is crucial, as is the frequency of monitoring and adapting policies and procedures where and when necessary.  The ability to demonstrate that individual issues and/or scenarios are well thought out, discussed and addressed not only displays the approach which occurred with regards to individual issues/scenarios, but more broadly suggests that an active program is in place and operating effectively.

Eric MacMillin is a Financial Services Group Audit Manager focusing on private equity, venture capital hedge funds and broker-dealers.

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