Watch your language

Now that sweeping financial reform has passed the US Senate, US private equity firms will have to get used to a new normal, writes Jenna Gottlieb.

The landmark legislation overhauling the US financial system includes a requirement for private equity firms to register with the Securities & Exchange Commission. Among the many changes that required SEC registration brings, perhaps the least anticipated revolve around permissible marketing language.

The language used in marketing materials and presentations must be scrutinised to assure that the firm is complying with SEC guidelines.

What does that mean? Managers will have to run a fine-tooth comb over all the marketing materials designed to solicit additional investors or maintain current investors. Managers will have to examine every pitchbook to be disseminated to prospective clients to make sure there are no qualitative comments or contain language such as “we’re a top firm.” Such statements need to be proven with quantifiable data.

Every conference speech and Powerpoint presentation must also meet the SEC guidelines.

Other materials will have to be routinely reviewed including: all correspondence between the adviser and the investors (such as quarterly letters), operating agreements, private placement memoranda and other offering materials, subscription agreements, capital account worksheets, custodial statements, and financial statements.

Along with new marketing challenges, managers will also have to designate a compliance officer, face regular inspections by the SEC, and explicitly outline how to deal with potential conflicts of interest.

With regard to SEC inspections, managers will be subject to a review of all correspondence with investors and any marketing materials used to solicit investors, compliance with registration exemptions including Regulation D, and a review of asset valuations.

Compliance does not mean the end of the world for private equity firms, but it does mean a new set of tasks that firm managers need to get right.