Disclose, disclose, disclose, recommends ACG regulatory task force

The Association for Corporate Growth has unveiled a set of recommendations for private equity firms looking to steer clear of trouble with the U.S. Securities and Exchange Commission, and a big theme is to spell out policies and procedures up front with investors.

The recommendations, which ACG calls principles, “really contribute to and support a culture of compliance, transparency and consistency, and I think the impact on the industry is going to be really important,” said Richard Jaffe, who is partner and co-head of the PE practice group at Duane Morris and who last year served a one-year term as chairman of ACG.

Starting in mid-2012, under the Dodd-Frank Act, buyout firms with at least $150 million of assets had to register with the SEC as investment advisers, subjecting them to a host of rules and regulations. Industry efforts to eliminate or ease the registration requirement fell short during the Obama administration, although the election of President Donald Trump has given private equity firms fresh hope.

In development for about two years by ACG’s private equity regulatory task force, the recommendations cover four main areas: co-investments, cybersecurity, fees and expenses and valuations.

The task force had originally intended to tackle broker-dealer registration, but decided against it. Amber Landis, the outgoing vice president of public policy at ACG, said it remains unclear whether the SEC intends to deem as broker-dealers PE firms that charge transaction fees.

Last spring, in a signal that firms should at least consider registering, the SEC found that buyout shop Blackstreet Capital Management LLC had violated the Securities Exchange Act of 1934 by performing brokerage services without registering as a broker-dealer. Blackstreet agreed to pay more than $3.1 million to settle charges without admitting or denying the findings.

The task force had also intended to provide guidance on advertising and marketing, such as on the handling of press releases, websites, and communications with the press. Exactly what constitutes “general solicitation,” prohibited under the SEC’s Reg D private-placement rules, has long been the subject of debate. But Landis said the SEC’s investment-management division was not comfortable with the PE regulatory task force’s proposed recommendations. The task force still would like to release recommendations in this area.

Meantime, here are a few highlights.

• Co-investments: Consistent disclosure of co-investment policies, such as how both opportunities and expenses are allocated, is the key. It should be done in the LP agreement, private-placement memorandum and other offering documents. In some cases LPs negotiate special rights related to co-investments in side letters, and these should in general be disclosed to potential investors.
• Cyber-security: Building off the SEC’s extensive guidance in this area, the task force labeled steps as either required, highly recommended or recommended — a useful analysis for small shops on a tight budget. For example, when it comes to vendors, the task force says it’s required to know what steps vendors take to ensure data is confidential. Highly recommended would be having policies and procedures giving vendors guidance and supervision in this area.
• Fees and expenses: Ensuring adequate and consistent disclosure of fees, expenses, carried interest paid, and reimbursements is the rule here. The task force defines key terms in this area, such as fee income and fee offsets, and describes what it means to have a fiduciary duty to disclose fees and expenses and any conflicts of interest that could arise.
• Valuations: The task force recommends spelling out a firm’s valuation methodology in all relevant documents, consistent with GAAP, and making sure that methodology is consistently applied across a portfolio. The task force doesn’t take a position on which valuation methods to use but recommends that valuations be updated quarterly.

The SEC has provided varying degrees of guidance on how PE firms should come into compliance with its rules and regulations. Sensing a need for more, ACG followed in the footsteps of other industry groups that have taken on the role of self-regulatory organizations, or SROs. The 54-member task force worked closely with SEC regulators to fashion its guidelines; but the SEC has not publicly commented on them nor is it expected to take a formal position on whether the industry should adopt them. A spokeswoman for the SEC declined to comment for this article.

Looking ahead, the task force plans to continue to update the guidelines. Along with providing recommendations on advertising and marketing, it would also like to work with the Institutional Limited Partners Association in the area of LP reporting guidelines.

The six members of the task force steering committee are Joshua Cherry-Seto, CFO at Blue Wolf Capital Partners; Blinn Cirella, CFO of Saw Mill Capital; David Gershman, partner and general counsel at Trivest; April Evans, partner, CFO and COO at Monitor Clipper Partners; Julianne Lis-Milam, partner, general counsel and CCO at Hammond, Kennedy, Whitney & Co; and Béla Schwartz, CFO of Riverside Co.

Action Item: Read the PERT principles here: http://bit.ly/2l7RC43

Image of Sherlock Holmes courtesy of ©iStock/Ostill

Correction: The ACG private equity regulatory task force recommends that co-investment-related items in side letters generally be disclosed to potential investors. The original version of this article said that was not the case. The task force also has only “required” and “highly recommended” actions in the area of cyber-security; the original version of this article included a “recommended” action.

Update: This article has been updated to reflect the publication of the ACG Private Equity Regulatory & Compliance Principles.