Not many people have the ability to create a storm by releasing a ‘Sunshine Statement’. But that’s exactly what Andrew Bowden of the US Securities & Exchange Commission did in May at PEI’s Private Fund Compliance Forum, with his remarks about what the regulator was finding during its presence exams of private equity managers. Since then, GPs have been hit with angry phone calls and long lists of questions from jumpy LPs.
There was one particular passage that prompted this storm: “By far, the most common observation our examiners have made when examining private equity firms has to do with the adviser’s collection of fees and allocation of expenses,” Bowden said. “When we have examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law or material weaknesses in controls over 50 percent of the time.”
However, in the subsequent months, there hasn’t been much additional commentary from the SEC about exactly what these violations were, who was involved, or what transgressors can expect in terms of enforcement actions. So Private Equity International went to Washington D.C to ask the man himself, in his Government office overlooking Capitol Hill.
“I think it’s too soon to tell how the SEC exams will shake out until they’re all done,” he demurs. “Our data in the original commentary was based on an initial 150 exams.”
The positive news, though, is that he thinks the industry has raised its game even since the storm broke. “Anecdotally, I would say there have been some changes in the behaviour on the part of funds and investors and that’s all for the good. I would tell GPs that want to know what to expect from the examination program to review the letter we sent out in October 2012. That had a lot of information in it, as well as reference material attached to the letter. So, my sort of ‘smart aleck’ remark is: that if a registrant is surprised by our examination process or the questions we ask then they haven’t been paying attention.”