The SEC's OCIE Provides Insight on its Private Equity Industry Initiatives and Objectives
On May 13th, Marc Wyatt, the Acting Director of the Office of Compliance Inspections and Examinations (the "OCIE") of theSecurities and Exchange Commission (the "SEC") addressed the SEC's increased interest in the private equity industry generally and the outlook for the OCIE's activities relating to private equity funds ("PE Funds") and their advisers ("PE Advisers"). Speaking at the Private Fund Compliance Forum, Mr. Wyatt discussed the effects that Dodd-Frank has had on the private equity industry, shared current industry developments and related data and provided clear and candid insight on how the OCIE intends to proceed with administering its oversight functions in the private equity space.
Some of the salient points of Mr. Wyatt's speech and our take-always include the following:
1. Following Dodd Frank's requirements that certain PE Advisers must become SEC-registered, the SEC has taken efforts to increase its presence in, and understanding of, the private equity industry. Examples of such efforts include the SEC creating a Private Funds Unit (the "PFU") and hiring a team of private equity veterans (which team is expected to impart a depth and breadth of private equity expertise and industry experience), conducting formal classroom training for its examiners and engaging with both general and limited partners to benefit from both perspectives. Mr. Wyatt explained the goal of these efforts is to demonstrate the SEC's understanding of the industry's various structures, business challenges, outside pressures and incentives and to allow it to better identify, examine and evaluate the key risk areas with regard to PE Funds.
2. The OCIE's 2012 Presence Exam Initiative encompassed over 150 examinations of PE Advisers, which examinations focused on a distinct set of issues: collection of fees, expense allocations, marketing and valuation. Espousing an estimated "two year or more" lead time between a typical presence examination and an enforcement action, Mr. Wyatt extrapolated that, as a result of this initiative, it is reasonable to assume the SEC will bring an increasing number of enforcement actions against PE Funds and PE Advisers in the next year.
3. The SEC's efforts in the private equity space have effectuated meaningful changes to industry disclosure practices, as demonstrated by the expanding the scope of disclosure on both PE Adviser's Form ADV Part 2 and, in some cases, within a PE Fund's website, to include explanations of the operating partners' roles, fees and fund expenses. PE Advisers and their general partners have demonstrated a higher commitment to compliance, by way of increased investments in internal resources or third party consultants.
4. Going forward, the SEC's hot-button issues will include expenses, expense allocations, co-investment allocations and disparate co-investment rights and related conflicts of interest. Mr. Wyatt also addressed its "thematic" review of PE Advisers in real estate, claiming such advisers are more "vertically integrated" than the traditional PE Adviser, as evidenced by such owner-operator PE Advisers offering a variety of "ancillary services" including property management, construction management and leasing services, all for additional fees and at times, charging back the cost of its employees and inside counsel.
5. Looking ahead, OCIE will apply a simple methodology in administering its oversight functions, in an effort to identify situations or behaviors which: (i) pose significant risk to investors or (ii) which are apparent violations of the securities laws.
To read the full speech, please click on the link below: http://www.sec.gov/news/speech/private-equity-look-back-and-glimpse-ahead.html
If you have any questions concerning this Alert, please contact Financial Services partner Lance Friedler at 212.573.8030 or John Araneo at 212.573.8158.