No more broken windows

If there’s a firm familiar with the Securities and Exchange Commission’s emphasis on enforcement in the past few years, it’s Blackstone.

Nearly two years ago, it agreed to one of the largest settlements ever for an alternative asset manager – $39 million– in relation to charges alleging the firm failed to fully inform investors on some accelerated monitoring fees.

Now that private equity lawyer Jay Clayton is head of the regulator, many believe private fund managers will get some relief on the enforcement front. They include John Finley, chief legal officer at Blackstone.

“I understand that former SEC officials expect that the ‘broken windows’ policy is not going to be the direction they take and that it will be an SEC focused on investor harm,” says Finley.

The tactic – made famous by New York City’s police clampdown in the 1990s – refers to the idea that pursuing the smallest infractions, the ‘broken windows,’ deters bigger crimes.

Under Mary Jo White’s leadership, the regulator achieved a record number of enforcement cases, with more than 2,850 actions and judgments, and a record amount of financial recoveries from such cases, totaling more than $13.8 billion.

But while firms may get relief on the enforcement front, Finley believes examination will remain at a sustained level. “I don’t expect that the exams are going to become easier,” he says.

Finley also says that as the exam staff become more knowledgeable about private equity, they are starting to conduct topic-specific sweeps. White echoed that view to pfm in April, when she said oversight of the private equity industry by the SEC would not be reversed.

The sustained focus on exams also means private equity firms must create a culture of compliance internally and focus on preparing policies, procedures and disclosures as best they can.

Finley notes that the culture of compliance must come from the top of a firm. “It is so empowering when your CEO will back you 100 percent, in terms of what you need to do and what you need to get done,” he says.

Blackstone regularly provides training; reviews its procedures, policies and key documents to ensure proper disclosure; and carries out testing. The firm conducts hundreds of training events a year, which Finley says is one of the best ways to prepare employees for real exams.

“It’s not going to be Game of Thrones and people are not going to say, ‘Boy I have another episode of training tomorrow,’” he says, referring to the HBO series. “But you can make them feel like it’s not a waste of time and the way we do that is by really focusing on real world issues that they’re going to be dealing with.”