What does ACA do and how do you interact with the PE community?
Our primary interaction with the private equity space is providing regulatory-compliance consulting on both the Investment Advisors Act and Investment Company Act — for folks that have [business-development companies. We work with] broker/dealers as well, so FINRA and SEC guidance.
We have a cybersecurity and risk-assessment group as well that’s worked extensively with our private equity client base, and a performance group that works on assessing track records and IRR calculations, both on a fund and portfolio-company level.
Are you seeing more questions about the reporting of performance in marketing materials when you’re helping GPs through their SEC examinations?
We’ve done a lot of work on our end to prepare our clients for some of these questions. It’s been a mixed bag as far as what we’re seeing in the field. Some exam teams will take interest in calculations to the point of recalculating or asking for detailed records, really digging into public disclosures. Other exams don’t touch on it.
What other areas of focus have you seen from the SEC in the past year? They’ve announced a couple of settlements recently.
I think a lot of the same things, for the most part. Behind everything there’s an interest in fees and expenses, allocations of expenses to the funds and to the portfolio companies, and then to affiliated groups like parallel co-investment vehicles or friends and family funds.
They’ll look at expense shifting and use of affiliated service providers. I think some of the newer focuses relate to end-of-life funds and any restructurings that may be taking place.
On the whole, private equity firms are more likely to have dual-hatted [chief compliance officers] than non-PE firms, so there’s competing interests for [their] time. The SEC’s assessing whether there’s enough time being devoted to that compliance function.
There’s heightened expectations for what internal staff are doing, even if that staff has other responsibilities.
How do they assess that? Do they ask for time sheets showing how much time/effort is being spent on internal compliance functions?
It’s more assessed based on effectiveness, like if they see a lot of little things slip through the cracks. These might be low-risk items, but if they’re not getting done, the SEC is likely to take issue with that and make that an indictment of the compliance program and the effectiveness of the CCO.
Going back to restructurings, it seems as if there’s been quite a bit of interest in the “do-nothing” option.
I think what the SEC is trying to get a handle on, first and foremost, is whether the [limited-partner agreement] is being followed. They’re asking questions about approvals, who’s seeing the information, is this something that needs to be approved by all LPs or just an LPAC or an advisory-board item? Are all material facts being presented across the LP base?
There’s been requests for emails around that process as well. My guess is, in those communications, they’re looking for places where there might be a conflict where LPs are offered different deals from others.
From what we’ve seen and heard, we’re still in the early phases of SEC enforcement activity. There might be more to come related to the issues that have already been referenced in prior enforcement actions, and new novel issues as well.
Photo of Jack Rader courtesy of ACA Compliance Group.