October 25, 2021

Volume XI, Number 298

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October 25, 2021

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Lest We Forget, the SEC Cares About Private Equity

During last week’s testimony before the Senate Committee on Banking, Housing, and Urban Affairs, the questioning of SEC Chair Gary Gensler focused on the expected topics of cryptocurrency regulation, ESG disclosures, and gamification. But Gensler’s written testimony circulated beforehand reminded the marketplace that private funds, including private equity, will continue to be a focal point.

In particular, Chair Gensler stated that the SEC is considering potential reforms regarding “the conflicts of interest [private fund] managers may have and the information they are providing investors about the fees they charge,” noting that “enhance[d] disclosures” will “better enabl[e] pensions and others . . . to get the information they need to make investment decisions.” While no proposed rulemaking has been announced, this suggests something may be in the works. Gensler also suggested continued focus by both the Examination and Enforcement Divisions, with later statements regarding the continuing importance of the SEC’s “robust enforcement and examination regimes.”

This testimony comes on the heels of May testimony provided before the U.S. House Appropriations Committee, where Gensler stressed the 58% growth in private equity funds over the last five years and stated he was seeking staff recommendations for increased private fund reporting and disclosure through, among other means, Form ADV and Form PF.

The SEC’s recent focus on private funds generally, and private equity specifically, was also reflected in the exam priorities announced by Examination Division this past March. These priorities included a focus on investment advisers to private funds, with a “focus on liquidity and disclosures of investment risks and conflicts of interest.” And while the Enforcement Division’s Asset Management Unit appears to be busy wrapping up the backlog of retail advisers’ conflicts of interest cases – reflecting the priorities of former Chair Jay Clayton – we fully expect to see a shift to the private fund world under Gensler.

In preparation, we advise private equity investment advisers to perform comprehensive reviews of their compliance programs and the disclosures in their offering documents and Forms ADV on the following topics:

  • The nature and number of advisory fees earned;

  • Expenses incurred by advisers and borne by the funds and their portfolio companies, including whether such expenses are charged in accordance with disclosures, sufficiently documented, and allocated appropriately; 

  • Advisory relationships with third party service providers to the funds and their portfolio companies;

  • Principal transactions and cross–trades within the private equity group;

  • Conflicts relating to liquidity and valuation in connection with adviser–led–fund restructurings; and

  • The process by which valuation of portfolio assets are arrived and its impact on management fees

Indeed, we understand that such topics are the focal point of recent examination requests. Accordingly, we recommend that advisers evaluate their practices and procedures surrounding the detection, evaluation, and monitoring of existing and new conflicts of interest. We also recommend that advisers evaluate their existing disclosures regarding conflicts, risks, and fees to ensure they are sufficiently detailed and complete.

© 2021 Foley & Lardner LLPNational Law Review, Volume XI, Number 266
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About this Author

Margaret Nelson Financial Attorney Foley & Lardner
Of Counsel

Margaret Gembala Nelson is of counsel with Foley & Lardner LLP, where she represents accounting firms, financial service entities, corporations and their professionals in auditor liability matters, government enforcement investigations and examinations, and complex securities and business litigation. She also conducts internal investigations on behalf of clients and advises on regulatory compliance and risk management issues.

Margaret has more than 15 years of experience as a regulatory and litigation lawyer focusing on complex securities, accounting, compliance, and commercial...

312.832.4376
Thomas J. Krysa Litigation Attorney Foley & Lardner Denver, CO
Partner

Thomas J. Krysa is a partner and litigation lawyer with Foley & Lardner LLP. Tom is based in the firm’s Denver office where he is a member of the Securities Enforcement & Litigation Practice. His practice focuses on advising clients in securities enforcement and litigation matters, government investigations, and complex commercial disputes. Tom, a former SEC senior officer and federal prosecutor, brings extensive government experience to the forefront to solve his clients’ problems short of government action, while at the same time preserving their interests should litigation and...

720-437-2010
Stuart E. Fross, Foley Lardner, Securities lawyer, Finance Attorney
Partner

Stuart Fross is a partner and business lawyer with Foley & Lardner LLP where he concentrates his practice on securities laws and regulations, as part of the Private Equity & Venture Capital, Transactional & Securities and International Practices.

Mr. Fross’ main focus is investment managers and pooled investment vehicles, including U.S. registered open-end, closed end and exchange traded funds, bank collective investment funds (with an emphasis a stable value funds), UCITS funds, as well as private funds, organized in the US and...

617-50-3382
Peter D. Fetzer, Securities Lawyer, Foley Lardner, Mergers Attorney
Partner

Peter Fetzer is a partner and business lawyer with Foley & Lardner LLP. His practice focuses primarily in the areas of securities regulation, mergers and acquisitions, corporate governance and general corporate counseling to mutual funds, exchange traded funds, publicly traded investment advisers and public companies.

414.297.5596
Stephen M. Meli Business Attorney Foley & Lardner Boston, MA
Partner

Stephen M. Meli is a partner and business lawyer with Foley & Lardner LLP. Steve is based in the firm’s Boston office where he is a member of the Transactions Practice and focuses on fund formation, emerging and spin-out fund sponsors and institutional investor representation.

Fund Formation Experience

Steve focuses his practice on lower and middle market buyout, venture capital, growth equity, credit and similar private funds, including funds-of-funds and secondary funds.

With an emphasis on commercial sense and practicality, Steve advises sponsors on every...

617-226-3107
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