Compliance Outreach Seminar New York Regional Office · Compliance Outreach Seminar New York...
Transcript of Compliance Outreach Seminar New York Regional Office · Compliance Outreach Seminar New York...
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Compliance Outreach Seminar New York Regional Office
Igor Rozenblit, Co-head , Private Funds Unit
Majid Mahmood, Examiner, NYRO John Martorano, Examiner, NYRO
June 18, 2015
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Disclaimer
“The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any
private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon
the staff of the Commission.”
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5 Members: Chairman + 4 Commissioners 5 Divisions
• Division of Corporation Finance • Division of Trading and Markets • Division of Investment
Management • Division of Enforcement • Division of Economic and Risk
Analysis (DERA)
Multiple Offices
• Office of Compliance, Inspections and Examinations.
• Office of the Chief Accountant • Office of the General Counsel • Office of International Affairs • Office of Investor Education and
Advocacy • Office of the Whistleblower HQ + 11 Regional Offices
How the SEC supervises HF and PE
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5 Members: Chairman + 4 Commissioners 5 Divisions
• Division of Corporation Finance • Division of Trading and Markets • Division of Investment
Management • Division of Enforcement • Division of Economic and Risk
Analysis (DERA)
Multiple Offices
• Office of Compliance, Inspections and Examinations
• Office of the Chief Accountant • Office of the General Counsel • Office of International Affairs • Office of Investor Education and
Advocacy • Office of the Whistleblower HQ + 11 Regional Offices
How the SEC supervises HF and PE
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Office of Compliance, Inspections & Examinations
Investment Management Enforcement
How the SEC supervises HF and PE
• Mission: Improve compliance, prevent fraud, inform policy and monitor risk.
• 400 + examiners focused on asset management.
• Private Funds Unit.
• Private Fund Specialized Working Group
• Private Funds Branch. • Asset Management Unit • ~75 Attorneys and
Industry Specialists.
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Private Funds Unit How the SEC supervises HF and PE
• Leadership: Igor Rozenblit
• Location: SEC Regions with high concentration of private fund advisers
• Composition: Highly experienced examiners and exam managers
• Activities: Conduct examinations of private fund advisers (improve compliance and prevent fraud), monitor risks, follow trends and build expertise.
• Private Fund Advisers: Hedge Funds, Private Equity, Infrastructure, Real Estate Private Equity etc.
• Exams: Risk priority, Presence, Cause, others
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Key Regulatory Documents (Public) Form Contents Location / System
ADV Part 1 Manager’s demographic information. IAPD: Investment Adviser Public Disclosure System (SEC Website)
ADV Part 2A Disclosure of fees, manager compensation, disciplinary history, conflicts of interest and other key arrangements.
IAPD: Investment Adviser Public Disclosure System (SEC Website)
ADV Part 2B Biographical information about Supervised Persons and long form discussion of topics contained in ADV 2A
Not filed with SEC but available by request from registrant.
Enforcement Action Notices
Releases are usually issued anytime there is a settlement, a filed case or a decision.
Internet/ SEC Website
S-1 IPO disclosures including information about monitoring agreement termination fees.
EDGAR (SEC Website)
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Key Regulatory Documents (Non-Public) Form Contents Form PF Demographic and some asset class level
data designed to help federal regulators monitor systemic risk and help the SEC protect investors.
Staff Findings / Deficiency Letters
Final document produced by SEC Examiners memorializing findings identified during an exam.
Subpoenas Issued by the Division of Enforcement during an active investigation.
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Private Equity Issues
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Fraud
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Operational and Reputational Risks
• Theft
• “Strategy Drift” --Investment Misappropriation
Manager Impairment
Returns Impairment
• Hidden Fees / Expense Shifting
• Favoritism / Deal
Allocation
• Hidden Team Issues
• Regulatory Sanctions
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Operational Issues: Fraud Issue: Theft: Misappropriation of fund assets for personal
gain. (Ex: Lawrence Penn / Camelot Management(1))
Possible Tests: • Test robustness of cash management procedures
• Ensure complete audits by qualified auditors
• Identify related party service providers
• Verify assets (Challenge in control situations)
• Conduct background checks
(1) Press release 1370540703682 (case is still pending)
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Operational Issues: Fraud Issue: Investment Misappropriation: Misappropriation of
fund assets into undisclosed investments. (Ex: Meditron Asset Management (1))
Possible Tests:
• Verify the existence of a robust Investment Committee process;
• Request and review memoranda
• Request capital call notices, LPAC presentations, fund financial statements.
• Ensure manager has proper expertise to execute stated strategy.
(1) Admin. Proc. File No. 3-15024
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Operational Issues: Manager Impairment Issue: Hidden Team Issues: Undisclosed plan team
departures which occur only after the closing of the fund.
Possible Tests:
• Ensure robust key man provision.
• Directly question the intentions of each key team member.
• Be wary of situations with stated strategy changes
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Operational Issues: Manager Impairment Issue: Regulatory Sanctions: Sanctions or investigations
by SEC resulting in business distractions, reputational damage or industry bars.
Possible Tests:
• Ensure Chief Compliance Officer is competent/autonomous and robust compliance program.
• Size of compliance staff. • Integration of compliance staff into the
business. • Compliance procedures covering high risk
areas. • Valuation, co-investment, fee and
expense disclosure, personal trading.
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Operational Issues: Returns Impairment Issue: Fee and Expense Issues: Charging unexpected
fees or allocating unexpected expenses to funds or portfolio companies.
Possible Tests:
• Ensure sufficient fee and expense disclosure and compliance mechanism.
• Verify past practices, especially in large control deals.
• Check S-1s for public firms. • Focus on Operating Partner/Senior Advisors;
relationships / agreements with portfolio companies.
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Operational Issues: Returns Impairment Issue: Favoritism / Deal Allocation: Allocation of
investments / co-investments / deal expenses to favored parties at the expense of investors.
Possible Tests:
• Verify the existence of acceptable co-investment, deal allocation and deal expense allocation policies.
• Validate the existence of a process to enforce the policies.
• Identify LP or related party mezzanine / debt providers.
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Continuous Operational Due Diligence
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-1 0 1 2 3 4 5 6 7 8 9 10 11
Fund Raising
Capital Deployment
Harvesting
Investor Oversight
Governance Gap
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Private Equity Real Estate Issues
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Operational Issues: Disclosure/Conflicts
INVESTMENT ADVISER/GP
(1) Investment Management Services
(2) Oversight of investments
(3) Vertical integration
PROPERTY MGR
(1) Affiliate, JV Partner or National
(2) Day-to-day responsibilities
(3) Provides transparency (if affiliated)
SERVICE PROVIDERS
(1) Affiliate or 3rd Party
(2) Construction, insurance, etc.
(3) Provides transparency (if affiliated)
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Operational Issues: Disclosure/Conflicts Issue: Fees/Expenses: Charging unexpected fees and
expenses at the property level
Possible Considerations: • Ensure adequate disclosure related to the use
of affiliates
• Identify conflicts related to the use of affiliated service providers
• Review controls in place to monitor such arrangements, including service providers
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Hedge Fund Issues
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Operational Issues: Disclosure Issue: Style Drift: Policies and Procedures and
marketing materials do not reflect the underlying business / portfolio Possible
Considerations: • How has the business changed
• Review risks inherent in new strategies
• Identify conflicts with existing portfolios • Do investor communications and marketing
materials reflect underlying portfolios
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Operational Issues: Conflicts Allocations: How are opportunities allocated across multiple portfolios
• How often is the allocation policy reviewed/set
• What are the economic consequences of the various fee structures
• How are potential conflicts communicated to investors
Issue:
Possible Considerations:
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Operational Issues: Disclosure Disclosure: Does underlying portfolio reflect the disclosure in offering docs
• Is portfolio risk consistent with offering materials and PPM regarding
• Excessive Leverage • Over-concentration • Use of derivatives • Liquidity • Counterparties
Issue:
Possible Considerations:
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Questions?
Igor Rozenblit [email protected]
212-336-0179
Majid Mahmood [email protected]
212-336-0030
John Martorano [email protected]
212-336-0580