Excerpt from remarks by Bruce Karpati, chief of the Securities and Exchange Commission Enforcement Division's Asset Management Unit, speaking Jan. 23 at the Private Equity International Conference in New York:
Private equity went through a significant growth spurt in the runup to the financial crisis and is a rapidly maturing industry. In terms of assets under management, it's roughly equivalent to, and perhaps larger than, the hedge fund industry. Also, many private equity managers have only recently become registered investment advisers. As a result of these developments, it's not unreasonable to think that the number of cases involving private equity will increase. Many in the private equity industry have pointed to the greater perceived alignment of interests in private equity products for instance, in the way carried interest is paid on realizations and not on net asset values, but private equity has other unique characteristics that may make the industry more susceptible to fraud, for example, the ability to control portfolio companies in a way not completely transparent to investors.
... The division has been bringing more private equity cases, as well as hedge fund and registered fund cases with private equity-like issues. ...
Private equity chief operating officers and chief financial officers are absolutely critical in making sure that clients' interests are placed ahead of the interests of the management company and its principals. As you know, the Investment Advisers Act of 1940 imposes on investment advisers a broad fiduciary duty to act in the best interest of their clients. This means that investment advisers have an affirmative duty of "utmost good faith, and full and fair disclosure of all material facts,' as well as an affirmative obligation "to employ reasonable care to avoid misleading' ... clients. n
This article originally appeared in the February 4, 2013 print issue as, "Private equity enforcement".