Your compliance blueprint

A growing rumour in the industry is that the US Securities and Exchange Commission will launch a “post-registration” sweep in the coming weeks. If true, it shouldn’t come as a shock. Ahead of its 30 March registration deadline, the SEC launched an investigation in December over how firms value their assets, and before that took a look into the industry’s relationship with sovereign wealth funds.
Taken all together, the sweeps underscore the heightened scrutiny GPs are under. Firms looking to lighten their stress load would be wise to heed the advice below: 

Compensate your CCOs fairly: Provide your chief compliance officer a salary on equal footing with other senior executives at the firm. Doing so demonstrates compliance is a top priority at your firm should it be one of the unlucky few to receive a surprise audit. As such the CCO should have strong qualifications and have direct access to the senior members of the firm.

Put on your detective hat: Legal sources say an adequate compliance program is more than just a system of identifying, and subsequently responding to, breaches in compliance. It should also involve a bit of forensic work. For example there is nothing inherently suspicious about a senior dealmaker pulling in the parking lot with a new Ferrari. But if the other senior partners are unable to afford similar luxuries, the SEC may want the CCO to raise a curious eyebrow.

Do not try to rewrite history: As compliance programs become more formalised, avoid filling in holes by submitting reports or documents that were due years ago. Instead acknowledge some holes exist from past procedures and detail how the firm plans to avoid similar gaps in the future. A cover-up is always worse than the offense.

Some things are better left said than written: Everything the SEC files from an inspection can be disclosed under the Freedom of Information Act (FOIA). However not always filed in full form are sit down conversations and interviews, so maybe better to share sensitive information via that route instead when able to do so. If not, at least see when your firm can request confidential treatment, meaning any FOIA request will result in advance notice to the firm.

End the inspection quickly: The sooner inspectors leave, the sooner you reduce the risk of a misstep. If that means interrupting a senior dealmakers holiday period to answer a few questions, so be it. However, do prepare staff adequately for interviews. And prepare them as if they were going to trial where anything said can potentially result in prosecution.

Designate a control person: Likely the CCO, this individual should act as the point person in communications with inspectors. Part of that responsibility means tracking any documents or information submitted to the SEC so that a useful and orderly timeline of SEC communications is on hand.

Spell out the math: Exceptional investment returns will be more interesting to regulators, especially so during fundraising periods. So be sure to properly explain the methodology behind strong valuations, or perhaps have third party auditors give their stamp of approval to your numbers.

Know your liabilities: Lastly, legal and compliance officers should be aware the SEC may hold them personally liable for misconduct should in certain circumstances they do too little to prevent it. Multiple legal sources say that even if a compliance officer was not part of the alleged misconduct, nor even directly responsible for the individual(s) committing the offense, that they could be held liable for failing to prevent it.

Good luck, though we trust you don’t need it.