- SEC examines exempt firms fingered for bad behavior
- Exempt firms not coming under routine examination cycle
- Exempt firms get on SEC radar usually through tips
Private equity firms exempt from registering with the SEC can rest easy: The SEC has not suddenly decided to examine you.
A recent speech by Marc Wyatt, director of the SEC’s Office of Compliance Inspections and Examinations, caused something of a sensation in the industry. In a speech to the American Bar Association’s Hedge Fund Sub-Committee last month, Wyatt allegedly said the SEC had begun examining exempt advisors as a routine matter, according to alerts from ACA Compliance Group and law firm Dechert.
This would be a major change in policy for the SEC, which has not subjected exempt advisors to examinations, except firms where there are indications of wrongdoing.
“Previous to this development, [exempt] firms have taken comfort in a minimal application of the Adviser’s Act, an arm’s length relationship with the SEC, and a pass on the National Examination Program,” said the alert from ACA Compliance Group issued in late November.
It’s not clear if Wyatt’s words were misinterpreted or if he misspoke. However, a source close to the SEC, told Buyouts that exempt advisors (firms managing $150 million or less) are not part of the SEC’s regular examine cycle of registered advisors.
The source pointed to a transcript of what then-Chairwoman Mary Schapiro said at the time the rules were adopted: “Although the law enables the commission to examine these ‘exempt but reporting advisers,’ we do not intend to conduct routine examinations of them. The Commission has scarce resources, and it is important … we target those resources toward the advisers that are actually registered with us, where the investing public expects us to be focused.”
Schapiro went on to say: “At the same time, if there are indications that we should conduct an onsite visit of an exempt but reporting investment adviser, we legitimately and appropriately will have the ability to do so.”
This means exempt advisors would be forced to open their books to examiners only if someone fingers them for nefarious behavior.
Examinations are rigorous processes whereby teams of SEC examiners move in and open the books, like an audit. Exams take time, cost money and many firms have built up back-office staff to be able to meet the additional burdens of SEC registration. Examinations would represent significant burdens for firms exempt from registration. (Venture capital firms across the board are exempt from registration, and there’s definitely a few of those that could handle the burden).
The SEC was right to keep small PE shops out of the regular examination cycle and it’s good the agency isn’t switching the way it handles these managers going forward.
Action Item: Read former SEC Chairwoman Mary Schapiro’s statements on exempt advisors.
Photo: Mary Shapiro, former chairwoman of the U.S. Securities and Exchange Commission, speaks during the SIFMA annual meeting in New York, October 23, 2012. REUTERS/Lucas Jackson