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Financials

U.S. SEC examiner cites more problems in private equity sector

WASHINGTON, May 13 (Reuters) - The new top examiner at the U.S. Securities and Exchange Commission said Wednesday that the agency is still finding some deficiencies in how private equity firms are complying with its regulations.

“Some progress has been made toward addressing some very important issues. However, there is still room for improvement,” said Marc Wyatt, the acting director of the SEC’s Office of Compliance, Inspections and Examinations, in prepared remarks.

Private equity firms are fairly new to SEC rules.

The SEC only won authority to require them to register and open their books to examiners in 2010, with the enactment of the Dodd-Frank Act.

Wyatt’s speech on Wednesday before the Private Equity International Compliance Forum in New York comes about a year after his predecessor Andrew Bowden gave a powerful speech on the industry saying there were widespread problems involving the allocation of expenses, hidden fees and concerns with valuations and marketing.

The problems were unearthed through a series of examinations of firms who had never-before faced such scrutiny by the agency.

Wyatt said that since the exams started, firms have made many improvements. However, he said problems still linger.

The most common deficiency, he said, still relates to expenses and expense allocation.

“Many managers still seem to take the position that if investors have not yet discovered and objected to their expense allocation methodology, then it must be legitimate and consistent with their fiduciary duty,” he said.

Other areas he cited included co-investment allocation, or the practice of letting an investor take an ownership in a singular deal.

“We have detected several instances where investors in a fund were not aware that another investor negotiated priority co-investment rights,” Wyatt said.

Finally, Wyatt told the audience that the SEC’s exam team is starting to also explore other asset classes in private equity, including real estate.

He noted that in doing so, the SEC found that at times the fees charged for certain ancillary services like property management, construction management and leasing were not always properly disclosed.

Further, he said, managers who do disclose the fees are “rarely” able to substantiate claims to investors that they are “at or below a market rate.”

“I hope that private equity real estate managers who have promised to provide their investors with “rates at or below market rate” review their benchmarking practices to ensure they can support their claims,” he said.

Reporting by Sarah N. Lynch

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