Do you accelerate monitoring fees? Don’t say you ‘may’ in your Form ADV.

Add to the list of things buyout executives should worry about to avoid running afoul of the SEC.

If your firm, say, routinely accelerates monitoring fees — a practice that rubs many investors the wrong way —don’t just say you “may” do that when filling out your Form ADV.

It’s not that GPs should never use the word “may,” according to Ken Harman, principal consultant and private equity specialist at ACA Compliance Group. But they should avoid doing so if it misleads investors about business practices and conflicts. SEC examiners, he said, want to make sure buyout firms are being fully transparent about their business practices.

The SEC provides similar advice to Form ADV filers: “If you have a conflict or engage in a practice with respect to some (but not all) types of classes of clients, advice, or transactions, indicate as such rather than disclosing that you ‘may’ have the conflict or engage in the practice.”

Harman said that using the word “may” to describe business practices that are obviously routine could subject your firm to an unwelcome examination. If you suspect you’ve crossed the line, you can file amendments to your Form ADV, he added.

The SEC has been ramping up its regulation of PE firms since the Dodd-Frank Financial Reform Act required most of them to register as investment advisers. In addition to being subject to SEC exams, such firms have to file Form ADVs, which describe basic facts about their organizations, including business practices, ownership and assets under management.

In its examinations and early enforcement actions, the SEC has focused particularly on disclosure of fees and expenses, along with conflicts of interest. The agency also has scrutinized political contributions made by firms to politicians with influence over public pensions.

Several SEC settlements have involved filings that use the word “may.” In 2014, the SEC settled with Total Wealth Management based on investments made from Altus Capital Opportunity Fund LP. The agency said the firm breached its fiduciary duty through a scheme to collect, and conceal receipt of, undisclosed revenue-sharing fees from investments they recommended to their clients.

As part of the charges, the SEC found that in the brochure section of its Form ADV, Total Wealth Management informed its clients that it “may” receive revenue-sharing fees. In fact, Total Wealth already was receiving revenue-sharing fees and it moreover failed to inform investors about the sources, recipients, amounts and duration of the fees, according to the SEC filing.

In settling, Nathan McNamee, former president and chief compliance office of the firm, and Douglas David Shoemaker, co-founder and former chief compliance officer, did not admit or deny the findings.

Action Item: Check out the Total Wealth settlement here: http://bit.ly/2u4oITC

A general exterior view of SEC headquarters in Washington on June 24, 2011. Photo courtesy Reuters/Jonathan Ernst