Private equity is nervously awaiting what many professionals expect will be heavier scrutiny under an SEC led by chairman Gary Gensler, who is not considered friendly to the industry.
As the threat of deeper enforcement looms, the co-head of the SEC’s private funds unit, Igor Rozenblit, has left the agency and launched a consultancy to help firms navigate their way through the turbulent waters.
Rozenblit announced this week the launch of his firm, Iron Road Partners, to work with alternatives shops on preparing for regulatory examinations and investigations, as well as designing compliance programs, managing challenging situations and even fundraising and operational due diligence.
Rozenblit formed the firm along with another former regulator, James Capezzuto, senior advisor. Capezzuto formerly worked as associate regional director and head of investment adviser and investment company compliance at the SEC. He also formerly worked as chief compliance officer at Oppenheimer Asset Management.
Perhaps more than anyone, Rozenblit has been in the center of the SEC’s scrutiny of private equity. He joined SEC in 2010 and a few years later became co-chair of the agency’s first private equity-focused examinations unit in 2014, alongside Marc Wyatt.
Iron Road Partners includes an LP advisory council, Rozenblit said, which is not yet being named. When considering risk and preparation around issues of regulation and compliance, the insight of limited partners can be invaluable to understand vulnerabilities private equity firms may have.
LPs have deep insider knowledge of where exactly a firm may be deficient in terms of adherence with a fund contract and disclosure of potential conflicts of interest.
“The SEC often picks up on risks the LPs highlight,” Rozenblit said.
This insight will become even more vital as the industry falls under the scrutiny of Gensler, chairman of the SEC, and Democratic members of Congress who have disdain for private equity, such as Sen. Elizabeth Warren.
SEC started its enforcement in earnest after the passage of the Dodd-Frank financial reform act in 2010, which forced most private equity firms to register as investment advisers. Registration made these firms eligible for periodic audits (or “exams”) by the SEC.
The exam regime led to numerous enforcement actions against firms for security laws violations, including some of the biggest names in private equity like Blackstone Group, KKR and Thomas H. Lee Partners.
Enforcement generally focused on firms’ failure to properly disclose certain activities like their ability to accelerate full payment of monitoring fees. Some believe enforcement became lax under the Trump Administration and SEC chairman Jay Clayton, whose focus was on increasing access to public markets.
Disclosure continues to be a major area of concern for private equity, along with the rapidly growing area of continuation funds, including single-asset funds, Rozenblit said.
As well, the SEC will likely focus on how GPs value their investments, he said. And, regulators will be looking to make sure GPs properly adjust management fee calculations in situations where an investment has been written down, or written off, he said.
SEC in 2019 settled with a firm called ECP Manager, which the agency said overcharged LPs by $102,304 in management fees. This happened after warrants the firm obtained on the common stock in an African mining company expired as worthless, yet were still included in the base amount the firm used to calculate management fees charged to the fund on two occasions, according to SEC documents.