A view from the SEC

These are my notes from the “A view from the SEC” session at the Private Fund Compliance Forum 2012.

This session will provide you with in-depth analysis of how the SEC is dealing with new registrants. SEC officials will answer your most pressing questions to help you ensure an efficient compliance program.

Carlo V. di Florio, Director, United States Securities and Exchange Commission, Office of Compliance Inspections and Examinations interviewed by Nicholas Donato, Editor, Private Equity Manager

Mr. di Florio started off with some post-registration statistics:

  • 3100 private funds with 8 trillion dollars in the funds.
  • 4000 registered private fund advisers
  • 37 of the 50 world’s biggest private equity fund managers are now registered.
  • 48 of 50 world’s biggest hedge fund managers are now registered.

OCIE is working on a letter to the industry this summer on what it means to be registered and what is the SEC expected. OCIE is getting ready to do targeted inspections this fall on new registrants. After the examinations, OCIE plans to come back and let the industry know hwat tey found as the biggest concerns and what the industry is doing well. OCIE wants to share information so that compliance can do a better job.

OCIE has been focused on getting new examiners with specific skills in the industry. They want real world insights, not just general examiners. OCIE wants to know where the risks are.

What makes the SEC happy?

  • The firm has the talent and understanding of what it means to be registered.
  • The firm has the tone at the top and acceptance from senior management. That also means the resources.
  • They want to see the compliance to be tailored to the firm and training focused on the individuals in the firm.
  • OCIE wants to see some good monitoring and testing.

Performance advertising is a hot button. It needs to fairly disclosed and fully disclosed.

Some things that are unique to private funds. Fees and expenses are a critical area. Throughout the life cycle of the fund. He noted that some funds seem to be extending their duration merely to keep collecting fees.

(Mr. di Florio seemed to be well versed on how private funds work and the issues specific to private funds. It sounds like the SEC has quickly gotten up to speed on the issues particular to to private funds and how they operate differently from retail investment advisers.)

OCIE has a solid focus on senior management. They want to see the firm’s view on complaince and want to reinforce that compliance should be important to the firm.

Culture of compliance includes asking the CCO if they have the resources they need.
Mr. di Florio surprisingly noted that compensation is an important part of the culture of compliance. Paychecks are critical decision points.

Will the SEC be visiting exempt, reporting advisers? (VC firms and mid-sized private fund managers) Yes.
How to get the SEC out the door as quickly as possible?

First, figure out why they decided to come. They are staying away from routine regular checklist exams and doing mostly risk based focused exams. When they show up or announce the exam, ask the examiner why they decidded to spend their time with your firm. Tips, complaints, and referrals is a common source. This has been beefed up in recent years. (Post-Madoff) Tips, complaints, and referrals are also a way for the industry to self-police. Another source is the whistleblower program under Dodd-Frank and the financial incentive for whistleblowers.

Once they arrive. They are going to dive into the area of risk that brought them to the firm. Be prepared. Have the documents ready. Have the people available to talk with the SEC examiners. Some of the biggest impediments are waiting for documents and waiting for people to be available.

Valuations is a focus for OCIE when looking at private equity. In particular is the use of valuation in performance advertising and fee calculation.

How can the CCO let the SEC know that they do not have enough resources? (Passing notes saying “HELP ME”?) THe SEC will have its own point of view and has a broader view of the industry and what is expected of the CCOs in the industry. SEC an be an amplifying voice. They want to support the CCO, not undercut the CCO.