Inspectors from the US Securities and Exchange Commission's (SEC's) Office of Compliance Inspections and Examinations (OCIE) are increasingly calling upon limited partners to provide their perspective on the nuances of fee and expense language. This is to determine if there is a disconnect between how investors read policies in fund documents and how general partners implement them, according to panelists at the 2015 PE/VC Finance and Compliance Forum in San Francisco.
One LP recounted a story of being called in to meet with the SEC to discuss certain items in an advisor's Form ADV Part 2 so that the SEC could determine whether the LP and the GP were interpreting the language differently, and to see if the LP believed he was being treated unfairly.
One GP at the conference noted that, in a similar “interpretive arm wrestling match” with examiners, the SEC had asked for LP input on certain fees and expenses by having the GP reach out to the LP Advisory Committee (LPAC) on the issue. The SEC asked the GP to record not only how the LPAC voted on the matter, but also all communications with LPs during the process, including email exchanges.
The issue boils down to a seeming disconnect the SEC sees between how GPs interpret their own fund language and LPs interpret that language, the panelists noted.
Another panel mentioned how the SEC often parses language by noting that firms should not say in their LPAs or Forms ADV Part 2 that particular fees or expenses “may” be charged. Rather, if those fees have ever been charged, the language should be changed to “do” or “does” in order to avoid scrutiny from the regulator.