SEC: Firms must be more critical of fees, expenses practice

Private equity firms should go beyond enforcement cases and speeches and look internally to identify problems that could arise during an SEC inspection, said the Commission’s Igor Rozenblit.

The private equity industry should be more proactive in identifying conflicts of interest related to fees and expenses that could be flagged up by the US Securities and Exchange Commission.

Speaking at the WSJ Pro Private Equity Analyst Conference last week in New York, Igor Rozenblit, co-head of the office of compliance inspections and examinations’ private funds unit at the SEC, said firms should focus more on their own business rather than enforcement cases and speeches.

“I wish firms would take a more critical look at what they’re doing,” he said.

Conway Dodge, managing director at Promontory Financial Group’s securities practice group, agreed that every enforcement case is nothing more than an autopsy.

“Compliance and legal should look around the corner to see what’s next,” he said. “You really need to be proactive. Enforcement cases and speeches are only a starting point. You should really take a look at your entire platform.”

A third panelist, James Gaven, senior counsel and chief compliance officer at Welsh, Carson, Anderson & Stowe, suggested that firms should look at every single fee and expense coming in on a regular basis. “If you find an expense that doesn’t fit in a bucket, look at who it benefits,” he said.

He said if it’s a grey area, the management company should pay for it at least in the first place, with the possibility to get a refund from the fund at a later point if it turns out it should be paid by the LPs.

Rozenblit also suggested GPs err on the side of caution, charging the management company when in doubt.

“Most GPs would take an ambiguity and interpret it to benefit them,” he said. “But a GP has a fiduciary duty so any ambiguity should eventually benefit your investor.”