Risk & Compliance

SEC Official Sees ‘Positive Change’ in Private Equity Firms

"Transparency has improved markedly" at private equity firms, says the commission's head of private funds compliance inspections.
Matthew HellerJanuary 23, 2015

Private equity firms have remedied some of their “more objectionable” deficiencies but more enforcement actions may be brought against them, according to a U.S. Securities and Exchange Commission official.

The SEC, which started monitoring the $3.8 trillion private equity market, said in May it had found illegal fees or severe compliance deficiencies in more than half of the firms it had examined. A particular area of concern for the SEC was how private equity firms charge expenses and fees to their investment clients, The New York Times reported.

At a conference Thursday in New York, Igor Rozenblit, the SEC’s co-head of private-funds compliance inspections and exams, said he had observed “a lot of positive change in the private equity industry” since the SEC began its exams.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

“The pace of change has been surprising,” he said, according to Bloomberg. “I don’t think we’re there yet, but transparency has improved markedly. Some of the more objectionable issues are just ending.”

Some of the largest private-equity firms, including Blackstone Group, KKR, and TPG Capital, have stopped collecting certain fees, disclosing previously hidden charges to clients, or refunding some levies to investors.

The SEC is also looking at accelerated monitoring fees, which are lump-sum payments for future services that aren’t provided because private equity firms sold the holdings earlier than an agreed-upon schedule. Firms have reaped more than $1 billion in the fees from companies they’ve taken public since 2010, according to data compiled by Bloomberg.

Rozenblit also said a specialized group of SEC examiners will focus on hedge funds and other funds that invest in illiquid products like real estate, timber, and energy assets. These new examinations will be more limited in scope than the examinations of private equity firms and would look “beyond buyout” funds to examine “adjacent illiquid asset classes” and “liquid asset classes.”

“We’re going to come up with a thesis, we’re going to pursue the thesis,” Rozenblit said.

Source: Bloomberg