An interesting news story emerged last week that some of you may have missed amid the leisurely languor of late August. Cipperman Compliance Services, a consultancy, recently surveyed a group of GPs about six high-profile SEC investigations; it found that nearly half of the managers hadn't heard of a single one of them. Around half were familiar with the two highest-profile cases: the investigations of hedge funds SAC and Galleon. But the recent whistleblower retaliation case against hedge fund Paradigm Capital, for example, seems to have largely slipped under the radar, at least for the firms in question.
In fact, on the basis of the survey – which also canvassed traditional asset managers, brokers and wealth managers – CCS concluded that alternative managers in particular “seemed to report less engagement with the realities of post Dodd-Frank compliance than other parts of the financial services sector”.
On the face of it, this seems peculiar. Ever since Andrew Bowden, the SEC's chief inspector, suggested at PEI’s Private Fund Compliance Forum in May that about half of the firms examined by the regulator were guilty of some sort of compliance violation, the industry has been abuzz with speculation about the SEC’s next steps. So GPs have good reason to take an active interest in its current cases.
To be fair, this apparent lack of urgency is probably due in part to the lack of subsequent guidance from the SEC. Several months on, nobody's really any the wiser about which private equity firms are involved, what they're supposed to have done, and what's going to happen to them as a result. Was this just meaningless sabre-rattling by the regulator, or the start of a whole new era? It’s still not clear. So last month, we decided to go to Washington DC and ask the man himself.
You can read our full and frank interview with Bowden in the September issue of PEI (and HERE). But here are a few of the key takeaways:
First, he says that if his May broadside took anyone in the industry by surprise, they should read their mail properly. “The letter we sent out in October 2012 … had a lot of information in it, as well as reference material attached to the letter. So … if a registrant is surprised by our examination process or the questions we ask, then they haven’t been paying attention.”
Second, Bowden insists that he’s not anti-private equity. “Broadly speaking, private equity has a great business model. Over the last 20 years or so …. [it] has added a huge amount of value. On the whole, [GPs have] delivered for their clients.”
Third, the SEC doesn’t care about the absolute level of fees per se: “As long as you’re fairly and fully describing what it is [investors are] going to pay for those services, we have no problem.”
Fourth, Bowden says that most firms are doing the right thing – and that he’s seen signs of improvement even since his infamous speech.
But notwithstanding all the above – Bowden was also quick to point out that there almost certainly will be more enforcement actions in the coming months (as, to be fair, the law of averages dictates, given that more firms are now registered).
And he insists that if firms are not doing exactly what they told their investors they were going to do, the SEC is ready, able and willing to hold them to account. “I think people have to understand that if they’re doing everything fairly, and clearly, and it’s on the up and up, we’re probably ok. But if you cross the line and breach your duty, or lie outright, we will give you no quarter. And we are looking.”
In other words: underestimate the regulator at your peril…
To read the rest of the interview – including Bowden’s thoughts on fees and expenses, conflicts of interest, the importance of trust, and the SEC’s lack of resource – click HERE.