SEC’s Marc Wyatt: Large firms exposed to greater regulatory risk

  • Addition of non-PE strategies leads to “higher risk profile”
  • Blackstone, KKR among early SEC enforcement actions
  • Lack of resources at smaller firms make them riskier, say sources

Private equity firms may expose themselves to greater regulatory risk when they expand into other asset classes, such as hedge fund or real estate strategies, said the SEC’s Director of the Office of Compliance Inspections and Examinations Marc Wyatt.

“We (examined) a cross-section of 25 percent of private funds, not just private equity, (and) the complexity of the firm can grow as the firm grows,” said Wyatt in an interview, noting that many larger private equity firms now offer real estate and hedge fund products, in additional to traditional buyout funds. “That may make them have a higher risk profile.”

Wyatt’s comments followed his mid-day keynote speech at the Coping with Regulatory Change: What’s Next in IA Compliance conference hosted by IA Watch and Buyouts Insider on November 17.

The SEC brought at least six enforcement actions against private equity firms since January, including against two of the industry’s biggest firms: Blackstone Group and Kohlberg Kravis Roberts & Co. In addition to private equity, both firms offer a wide variety of funds and investment products in credit, real estate and hedge-related strategies.

Sources who spoke with Buyouts agreed with Wyatt’s assertion that a more diverse line of product offerings could expose firms to scrutiny from a greater number of regulators, but only in theory. As one source with knowledge of compliance policies at a large asset management firm put it: “I guess that’s ipso facto correct, but it shouldn’t be a matter of public policy.”

If firms were to spin off each respective business segment, the government would still have to expend the same amount of resources to examine each of those segments, sources told Buyouts. If anything, amassing a range of strategies under a single umbrella can create efficiencies in how regulators engage with firms over concerns relating to compliance, auditing and accounting.

“A large firm with different offerings isn’t inherently riskier. Firms that pursue multiple lines of business make the requisite compliance and risk management adjustments for such growth,” said James Maloney of industry lobbying group Private Equity Growth Capital Council.

Furthermore, as firms expand, they often hire professionals with expertise in compliance or accounting to manage certain back office capabilities – particularly if they plan on going public, sources said. Smaller firms often rely on chief investment officers or chief financial officers to handle compliance and regulatory concerns, adding to their existing responsibilities.

“Most of the real problems, the ones that are hair-raising, are at the smaller firms,” said the source with knowledge of compliance policies.

Even so, Blackstone and KKR were among the first private equity firms to receive SEC enforcement actions. In October, Blackstone agreed to pay $39 million for failing to inform investors about the amounts it received in accelerated monitoring fees and legal fee discounts. KKR paid roughly $30 million for misallocating broken deal expenses.

Blackstone and KKR did not admit or deny any of the SEC’s findings.

“Bigger firms are likely to be targets. At a minimum, they’ll be the first people to have their exams,” said a separate source with knowledge of compliance issues at larger firms.

Enforcement actions against more established firms also sends a message to the industry at large, sources said. At a November California Public Employees’ Retirement System meeting, California State Controller and CalPERS board member Betty Yee asked if Blackstone’s settlement furthered ongoing efforts to enhance transparency around fees and expenses.  

“The industry has definitely taken notice. I think it’s opened up a dialog with LPs and GPs on a granular level that didn’t exist before,” said Paul McCoy of Morgan, Lewis & Bockius, who presented at the meeting.

Action Item: To learn more about the SEC’s enforcement actions against private equity firms, visit:

Photo courtesy of Reuters