Conducting an Effective Annual Review

These are my notes from the “Conducting an effective annual review” session at the Private Fund Compliance Forum 2012.

Charles Lerner, Editor, The US Private Equity Fund Compliance Guide and The US Private Equity Fund Compliance Companion & Principal, Fiduciary Compliance Associates LLC
Panel Members
Nicholas Denton-Clark, Managing Director & Chief Compliance Officer, PineBridge Investments LLC
Kelly S. Hale, Compliance Officer, TA Associates
Danielle M. PerfetuoChief Compliance Officer & Counsel, Alcion Ventures
Robert E. Phay, Jr., Associate General Counsel & CCO, Commonfund

You are required to update the policies and procedures every year. That means date them.

One topic was whether to run the annual review throughout the year or all at once. Panelists came down on each side.

One panelist looked that the litigation releases to see what went wrong with other firms. That adds a perspective on whether the firm’s policies and procedures could address and prevent the problem. It’s a also a great tool to help educate business people on compliance problems.

Top Ten things to consider when conducting an annual review

  1. Utilize your risk assessment to determine focus areas
  2. Review new products or business lines and current market conditions
  3. Review results and issues raised in previous review
  4. Review top SEC deficiency and focus areas
  5. Ensure new rules, regulations and guidance are addressed in your policies and procedures
  6. Confirm conflicts of interests are addressed and/or mitigated
  7. Interview employees to assess program effectiveness
  8. Review your disclosure documents and other regulatory filings
  9. Test the effectiveness of and compliance with your policies
  10. Document your review

For new registrants, Charles recommended that you do the annual review in the fall. If it’s a bust, then don’t document the review. Then do another in early 2013, within a year of registration, hopefully with the problems fixed from the busted annual review.

The SEC does not require a written report, but it needs to be a written report. How else can you prove that you did the annual review unless there was a written report. They key is to show that you were thoughtful about the process.

What goes into the report? List everything that you looked at, what problems were discovered or changes that could impact the item, proposed changes, and follow up.

What do you do if the policy is not being followed? Depends on the rule. If it follows the SEC required minimum then you need more training. Otherwise, adjust the policy so there are fewer transgressions. For example, if your policy requires pre-clearance of political contributions and people are not pre-clearing. Maybe you remove the requirement of pre-clearance.

Allocation of expenses is a hot button for the SEC when it comes to private equity. That includes calculation of the fee.

What happens if a limited partner asks for a copy of the annual review? Don’t give it to them. If the LP is a public pension fund, that document would be subject to a FOIA request.

Most of the panelists used outside counsel as an intermediary for annual review and some forensic testing. That makes the attorney-client privilege as a defense to producing the report. If the SEC asks, it’s probably still a good idea to give it to them.

It’s a good idea to keep individual names out of the annual review so that the names don’t end up in a SEC deficiency letter.