SEC to target fees, cybersecurity in 2015 exams

Following a grand sweep of newly registered private fund advisors over the past two years, the US Securities and Exchange Commission added private equity fees and expenses as an examination priority area in 2015.   

“Given the high rate of deficiencies that we have observed among advisers to private equity funds in connection with fees and expenses, we will continue to conduct examinations in this area,” the SEC said in the document.

Andrew Bowden, who spearheads the commission’s Office of Compliance Inspections and Examinations (OCIE), flagged private equity fees and expenses as an area of concern for inspectors during the 2014 PEI Private Fund Compliance Forum in New York. Since that time, GPs have been making additional disclosures to investors on fees and expenses and rethinking which costs are absorbed by the management firm.

The notice lists many “market-wide risks” that the OCIE will target in 2015, including cybersecurity, which was the focus of an initiative launched by the SEC last year to examine the cybersecurity compliance and controls at broker dealers and investment advisers.

When monitoring alternative investment firms, OCIE will focus on valuation policies and practices, staffing and “the empowerment of boards and compliance personnel” at the firms and the manner in which funds are marketed to investors.

The OCIE also plans to use the “significant enhancements” to its data analytics tools in order to target a number of areas including anti-money laundering. The department will focus on firms that have not filed suspicious activity reports, or submitted late or incomplete reports.

Despite the many goals for this year’s exam program, it is unlikely that the SEC will have the funding necessary to reach all of them. Congress has yet to approve a 2015 budget for the agency, but the Republican-majority House of Representatives approved an appropriations bill in June that would increase the SEC budget by only $50 million to $1.4 billion, $300 million less than the agency requested.

If the final budget remains similar to that approved by the House, it is not likely that the OCIE will be able to hire the 316 additional staff members it requested for the year. Of those new positions, 275 would be dedicated to the examinations of investment advisers and broker dealers.