As a former senior compliance officer for Hewitt EnnisKnupp, Inc., I’ve seen the United States Securities and Exchange Commission (SEC) steadily increased its compliance demands. It seemed to start slowly for private equity funds, with the majority of the initial Dodd Frank burden being carried by hedge funds. But the day is fast arriving for private equity funds, if it hasn’t already arrived.
Registration as an investment adviser, with either the SEC or a state securities agency, requires an ongoing program of compliance. State securities agencies, such as our own Illinois Securities Department, almost universally look to the SEC for leadership in this regard and rely upon them for regulatory guidance. Accordingly, best practices in compliance requires following SEC guidance. The SEC’s emphasis on the ongoing and constantly evolving nature of a compliance program is one that consistently causes trouble for newly formed advisors. Private equity fund advisors, who are a relatively new addition to the SEC’s regulatory oversight, are particularly vulnerable to overlooking essential compliance tasks since it is not part of the industry culture.
Along these lines, the SEC has been very vocal about its desire to investigate newly formed and/or newly registered private equity funds, including forming a special task force specifically organized and trained to perform this task. Recently, the SEC has also spoken out about the consistent deficiencies that it has uncovered in private equity investing, publicly noting in May, with several recent enforcement actions emphasizing the point, that significant issues were found in over 50% of the funds that it had investigated. Consequently, institutional investors have been quick to seize upon the compliance programs of potential investments as an increasingly important piece in their investing checklist. For institutional investors, a thorough review of compliance matters is an essential way to meet their fiduciary duties to their own investors and to quickly weed out private equity firms that are not suitable.
This twin focus, from both regulators and potential investors, on compliance issues has raised the importance of understanding investment adviser registration as much more than just an initial registration, but as an ongoing set of tasks that play a critical role in the organization and constant attention.
Lesson Learned: The compliance burden is only getting larger and it pays to be prepared.
Randy J. Heinig, Esq.
Director and General Counsel
NexTier Companies, LLC