SEC Acting Director of OCIE Discusses Examination Priorities for Private Equity Funds (with Mehta Comment)

SEC Acting Director of the Office of Compliance Inspections and Examinations ("OCIE") Marc Wyatt spoke about the previous accomplishments of the OCIE and future exam priorities.

Mr. Wyatt provided a recap of the areas in which the OCIE has focused its examinations since the enactment of the Dodd-Frank Act. These include advisers' collection of fees, allocation of expenses, marketing and valuation. He stated that the focus on these areas has resulted in "influence beyond exams," including greater attention and resources paid to compliance programs. Additionally, Mr. Wyatt noted, OCIE examinations have "enabled" limited partners to focus their resources and priorities on new due diligence procedures.

Although Mr. Wyatt remained optimistic about the progress made by firms regarding compliance, he stated that there is still room for improvement in areas such as fees, the allocation of expenses and valuation. According to Mr. Wyatt, the most common deficiencies found by OCIE examiners in private equity include expenses and expense allocation. Mr. Wyatt noted that this practice can be difficult for investors to detect, but easy for OCIE examiners to test.

Mr. Wyatt also explained that examiners are looking at adjacent asset classes more systematically; specifically, at private equity real estate advisers. He explained that real estate managers tend to be more vertically integrated than traditional private equity managers, which allows them to provide ancillary services and charge fees that they assert are "at market or lower" without data to justify their claims.

Mr. Wyatt stated that the OCIE intends to continue to apply its risk methodology to private equity selection, which involves identifying situations or behaviors that pose significant risk to investors or violate federal securities laws and regulations.

Mehta Comment: Chief Compliance Officers and Chief Financial Officers at investment advisers must focus on whether expense allocations are (i) appropriately disclosed, (ii) effected in a manner that is consistent with a fund's disclosure and constituent documents, (iii) fair and reasonable and (iv) well documented.

See: Mr. Wyatt's Remarks.