SEC more aggressive after financial crisis, just in time for PE: panel

  • Timing coincides with greater regulation of private equity
  • SEC enforcement, examination divisions collaborating more
  • “Minor deficiencies” now subject for enforcement, say panelists

The SEC became aggressive after the global financial crisis and the Bernie Madoff scandal at around the same time private equity came under the agency’s scrutiny.

For GPs, this meant the SEC’s examinations and enforcement divisions began to work together more, which led to several enforcement actions against major private equity firms.

“You’re dealing with an exam that, 10 years ago I thought would have been relatively routine,” said Mark Schonfeld of law firm Gibson Dunn, who is a former director with the SEC’s New York regional office. “Nowadays you really have to keep your eyes out for [SEC] staff focusing on anything that could be thought of as minor deficiencies. Because they could lead to enforcements.”

Schonfeld spoke on a panel on November 17 in Washington, D.C., called “Coping with Regulatory Change: What’s Next in IA Compliance,” hosted by IA Watch, a Buyouts sister publication.

The SEC was roundly criticized for its failure to detect Madoff’s Ponzi scheme despite fielding complaints about the former securities broker in the decade leading up to his arrest. Fear of another Madoff-sized slip, along with lingering public distrust following the financial crisis, incentivized regulators to “avoid making a mistake, rather than coming to a decision,” said William McLucas of Wilmer Cutler Pickering Hale and Dorr LLP. “We’ve upset the equilibrium a little bit.”

“Cases/investigations tend to go on and on and on and on. And they do that because there’s a sense in the building that there’s no reward for closing a case and making a decision and moving on,” McLucas said. He spent eight years as the director of the SEC’s enforcement division, the longest tenure in the commission’s history.

Private equity experienced the biggest change in this newer, more aggressive era simply because the industry had never been subject to SEC scrutiny until Dodd-Frank became law in 2010, Schonfeld said.

Private equity “operates with a different set of relationships and standards with their LPs than say, hedge funds,” he said.

The SEC cracked down on major private equity firms like Blackstone Group and Kohlberg Kravis Roberts & Co in recent months for issues involving misallocating broken deal expenses and accelerated monitoring fees.

Photo of Bernie Madoff courtesy of Reuters/Shannon Stapleton