Co-investment and capital call facility disclosures will remain top of mind when it comes to private equity enforcement by the SEC, the regional director for the agency’s San Francisco office said Tuesday.
The SEC’s Jina Choi, speaking at PartnerConnect West 2017, emphasized that the agency will maintain its independence under the Trump administration as it focuses on these issues, among other things.
“One thing that’s become very apparent to me, and I don’t think I recognized it until this administration,” Choi said, “is how important it is that the SEC is an independent agency. I had always heard that, but I don’t think it had ever really hit home to me.”
Having five political appointees, and not a single head that approves enforcement actions, has a moderating effect at the SEC, she said: “I don’t know that our day-to-day has changed much at all,” she said.
Speaking at the Ritz-Carlton in Half Moon Bay, California, Choi told attendees that PE and private fund advisers are an important part of the investor adviser landscape for the national exam program.
“It is an area that we have put a good amount of focus on, and we will continue to put a good amount of focus on,” Choi said.
Still, the remarks made by SEC Chairman Jay Clayton at the Economic Club of New York provided greater insight around the agency’s guiding principles for rulemaking, Choi said. The specific policy guidelines detailed by the new Chairman in July included protecting ordinary investors, easing disclosure rules for public companies, among other things.
“The idea that there [are] sophisticated, well-informed investors that can fend for themselves kind of resonates with us,” she said. “On another level I think it is very important that we are out there to protect the retail investor, especially with this Chairman.”
Co-investment and capital call facilities are a couple areas the SEC has been dedicating resources to when it comes to private equity enforcement, Choi said. The agency will continue to look at these issues, as well as fees and expenses, valuations and other conflicts of interest, she said.
The concern around co-investment is the idea that it favors particular groups of investors of the fund, Choi said: “I think that inherently has conflict and has issues that we’ve highlighted.”
Choi also spoke to the evolution of capital call facilities, which in the past she said she had always thought of as short-term loans that provide liquidity, optionality and greater efficiency.
“To the extent that that has changed and to the extent that that is affecting internal rates of return numbers, I think that that’s something private funds should be taking a look at and advisers should be taking a look at, because it’s a fiduciary relationship that you have,” Choi said.
“I can understand why people or why decision-makers decide to tap into this, yet at the same time, if it’s really just to boost your performance, that’s a problem,” she said.
Action Item: SEC Chairman Jay Clayton’s remarks at the Economic Club of New York https://www.sec.gov/news/speech/remarks-economic-club-new-york
A general exterior view of the U.S. Securities and Exchange Commission (SEC) headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst