Updated with correction
Private equity and hedge fund managers, prodded by their institutional clients, are taking compliance more seriously as federal examiners and enforcers up their game targeting practices they say put investors at a disadvantage.
“This is a new environment because the SEC, especially in the private equity context, is focusing less on complying with a set of rules and more on whether a manager, without adequate explanation to its clients, is taking actions primarily for its own benefit,” said Deborah Prutzman, founder and CEO of New York-based Regulatory Fundamentals Group, a compliance consultant to institutional investors. “Managers may find that practices they considered well-settled are less accepted than they thought.”
Before the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required private fund managers to register with the SEC, the managers “probably had a pretty low expectation of (self-interested) behavior being detected,” Andrew Bowden, director of the Securities and Exchange Commission's office of compliance inspections and examinations, said at an Oct. 22 compliance conference near Washington.
SEC examiners have gotten better at knowing what to look for, Mr. Bowden said, thanks to a private fund specialized working group that includes former industry executives. And the examiners are talking more with the SEC's enforcers, who have their own specialized asset management unit, all of whom work closely with the commission's investment management division to understand what they are seeing.
While private equity firms are a newer subject for SEC officials more familiar with hedge funds that managed other types of accounts and were already registered, “the general sense that we get is that their expertise has improved,” said a private equity industry insider. “That's a good thing because the last thing you want is a trigger-happy regulator.”
SEC officials are targeting specific practices, such as fees, valuation, expense allocations to clients, incentive structures and conflicts of interest. Hedge fund managers are also part of wider campaigns against insider trading and aberrationally good performance returns.