The exam team at the US Securities and Exchange Commission (SEC) is targeting co-investment allocation and real estate advisers in its current and future exams, according to acting director of the Office of Compliance Exams and Inspections (OCIE) Marc Wyatt.
In his first speech of his tenure as acting director at PEI’s Private Fund Compliance Forum, Wyatt noted that his team has seen improvement in private fund advisers’ fee and expense disclosures, but that more work needs to be done in terms of how GPs disclose co-investment opportunities to their LPs.
Although the SEC has spoken out before on co-investment policies, Wyatt came down hard on disclosures for co-investment rights, stating, “Allocating co-investment opportunities in a manner that is contrary to what you have promised your investors can be a material conflict and can result in violations of federal securities laws and regulations.”
He noted that “many in the industry” have responded by disclosing less about co-investment allocation rather than more, aiming to avoid promising investors anything so that they cannot be held accountable. But those GPs still make promises to LPs orally or via email. The best way to avoid a violation is by having a “robust and detailed” policy shared with all investors, Wyatt said.
“I am not saying that an adviser must allocate its co-investments pro-rata or in any other particular manner, but I am suggesting that all investors deserve to know where they stand in the co-investment priority stack,” Wyatt noted.
He also gave further information about the SEC’s recent initiative to examine more private real estate fund managers, focusing on the disclosure of fees and expenses in vertically integrated real estate GPs (those who do property management in-house).
The exam team found that some managers charge funds for costs of employees who provide asset management services and in-house attorneys, often not disclosing these fees to LPs or claiming fees would be at or below market rate, without being able to back up those claims. Wyatt said some real estate managers collect no data to justify their fees at all, or when they do collect information, what is presented to investors can be misleading.
“I hope that private equity real estate managers who have promised to provide their investors with ‘rates at or below market rate’ review their benchmarking practices to ensure they can support their claims,” he said.
During the Q&A session following his speech, Wyatt urged the CCOs in attendance to ask clarifying questions during exams, after noticing a lack of crosstalk between his team and examinees throughout the process. “We’re not trying to be a gotcha regulator,” he said.
He also noted the importance of the CCO role at the firm, calling them “helpers” to the SEC. When it comes to firm dynamics, he said, “CCOs voices need to be heard.”