Dodd Who?

comment - 18 February 2014

Dodd Who?

On 23 January 2013 in a speech delivered to the Private Equity International Conference in New York, Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit warned the private equity industry of increasing scrutiny over their operations.

This warning it seems, is driven by the SEC’s view that the private equity industry has a number of characteristics which means that it lacks transparency and therefore is open to abusive/fraudulent practices.

The warning came only a few months after the SEC issued a letter identifying five high risk areas which they would seek to focus on when conducting ‘presence exams’:

(a) marketing;
(b) portfolio management;
(c) conflicts of interest;
(d) safety of client assets; and
(e) valuation.

Although ERAs are not subject to the compliance rule set out in Rule 206(4)-7 under the Advisers Act, which would require them to adopt a comprehensive compliance program, ERA’s are subject to the anti-fraud provisions of the Advisers Act and as such should adopt reasonable compliance and oversight procedures to guard against a breach of the ERA’s fiduciary duty to clients and the relevant anti-fraud provisions.

It is still unclear to what extent the SEC will be prepared to conduct no fault presence visits for non US ERA’s, but notwithstanding this uncertainty, when dealing with any annual updating filings required under the Dodd Frank legislation, ERAs should take the opportunity to reconsider their compliance procedures to ensure that they adequately cover the areas identified above.

The deadline for filing annual updates for those ERAs whose fiscal year ended on 31 December is 31 March 2013.

previous comment / Udi Vithanage

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