Private Equity International’s 2019 Private Fund Compliance Forum in New York is over for the year. If you missed out on the insight – we heard from the Securities and Exchange Commission’s New York regional director Marc Berger (more on that soon) – or the candid swapping of notes, then here are five takeaways for you:
1. Surviving as a team of one
Compliance teams tend to be small – more than a quarter of delegates who answered an onsite poll said they were a compliance team of one. One CCO at the conference expressed the importance of communicating with your firm about how the role should be focused.
“I went to them and said ‘here’s my 200-item to-do list and here’s the two that I’ve gotten to so far,'” the CCO said. “Is this really how you want me to be spending my time? If you want me to be the highest paid trade clearer [or] non-disclosure agreement checker in the market, that’s great, but I don’t think that’s why you brought me in here.”
2. Valuations committee: a CCO seat at the table
At most firms (86 percent, according to our delegate polls), the CCO either sits in on valuation committee meetings as an observer or as a full and active member. In a panel discussion on the topic, experts agreed that investors are asking more and more for third-party involvement when it comes to valuations because it makes them feel “more comfortable.”
3. Mock SEC exams: the only time you shouldn’t get it in writing
Mock exams are a great way for private equity firms to get ready for a potential visit from the SEC. Most firms – 75 percent, according to a delegate poll – engaged a consultant to run a mock exam process. One lawyer at the event noted that it was important to “not get the results of mock exams in writing” so as to avoid documentation issues and to keep the information as confidential as possible. This came as a surprise to 64 percent of CCOs at the conference, who did exactly that.
4. Don’t forget marketing rules
Marketing rules may not be number one on your list of compliance worries. In fact, when delegates were asked whether marketing materials were one of the SEC’s focuses during their most recent exam, half said no, and only a quarter said yes (a further quarter had not yet been examined). But ignore them at your peril, said one lawyer, noting that a common issue he finds with clients marketing materials is “inconsistency in footnotes across quarters and presentations.”
5. The importance of expense testing
Fees and expenses are the top issue picked up in exams, delegates said.
“In my past three years at the firm, [in] every single exam I worked on, at least one expense wasn’t being allocated the way that the senior management thought it was being allocated,” one private fund lawyer said. “Fees and expenses remain the number one issue.”
The lawyer went on to say it is the issue most consistently scrutinized by the SEC, as reported by pfm.
More than half of respondents attending an expense-testing panel said they had gone through an SEC exam in which the regulator reviewed expense allocation. Despite this, only 29 percent of the same respondents said they test expenses regularly.