- Panelists at Buyouts Chicago recommend using outside counsel, consultants
- Clarity of co-investment programs is becoming a focus for SEC
- ACG to send out surveys on best practices
That’s the advice given by a panel of experts at Buyouts Chicago on June 24. SEC exam manager Brad Kartholl said PE firms should “always be prepared” for a possible exam, which may take place about once a decade or less. He didn’t provide any details on specific triggers the SEC uses to decide which firms will receive a visit.
Kartholl noted that the SEC made a “pretty big dent” in its presence exams following implementation of Dodd-Frank, but he said “quite a bit of the population has not yet been covered.”
PE firms should keep their house in order with a chief compliance officer and annual review of policies and procedures, and their limited partner agreements should be clear and vetted with investors, he said.
“We’re looking for all co-investment elements to be known [to LPs],” he said.
Speaking on the same panel, David Smolen, general counsel and chief compliance officer at GI Partners, said GPs should take the process “very seriously.” The SEC has done a good job reaching out to the industry at events, he said. Since it’s hard to build up expertise on the process given that exams take place infrequently, Smolen recommended use of outside counsels and consultants to offer advice.
“I’d look to as many outside resources as you can,” he said. On the plus side, the SEC’s knowledge of the industry has been improving quickly. “They’re asking much more finely tuned questions,” Smolen said.
Panelist Patrick Michel, counsel at Sidley Austin, said the SEC is trying to level the playing field between big LPs and smaller LPs in regard to co-investment opportunities.
“If the SEC had its way, you’d start by offering [co-investment] opportunities where everybody could participate,” he said. “Figure out early in the process if there is a benchmark for LPs in terms of dollar thresholds and disclose what that is to other LPs.”
Limited partner agreements are sometimes written to give GPs more flexibility, but it’s better to promote clarity instead, in order to reduce ambiguities in the LP-GP relationship, Michel said.
Panelist Amber Landis, director of public policy at the Association for Corporate Growth, said ACG’s Private Equity Regulatory Task Force plans to send surveys to GPs to help create best practices, with a focus on six areas: fees and expenses; advertising, broker dealers guidelines, valuations, co-investments and conflicts of interest. The surveys will be sent in the coming weeks, with the hope of sharing drafts of best practices by the end of the year, she said.
“We’re looking to drill down and understand what practices are in the industry and tell some of the good stories,” she said. “Clarity is always key. In terms of changing behavior [the industry] is getting more transparent and that’s a trend you’ll continue to see.”