Toeing the line

The PEI Private Fund Finance and Compliance Forum, held last week in San Francisco, sought to answer some of the most pressing questions of the moment for those charged with keeping the regulators from knocking on their firm’s door.

More than 150 fund compliance professionals gathered to swap ideas. Here’s a roundup of some of the issues prevalent over the course of the event.

Being compliant is everyone’s responsibility…
A CCO is there to put compliance measures into place and to keep up with regulatory requirements, but the responsibility for ensuring compliance lies with everyone in a firm. All staff must be kept informed, trained, and feel comfortable calling out any red flags that could result in a compliance breach. Outsourcing aspects of your compliance program does not alleviate the firm’s responsibility either.

…but don’t let compliance issues take over
The firm has to operate – it’s an investment firm, not a compliance firm. The compliance program should be built to fit the firm, not the other way around. Don’t be afraid to say no if a compliance measure is going to be too onerous. Find an alternative solution.

The devil’s in the detail
Policies can never be too explicit. Fees and expenses policies, for example, should specify exactly what can and cannot be expensed. A consistent travel booking policy, and making sure everyone keeps all receipts for expenses accrued while on a business trip, are key to ensuring transparency when it comes to T&E reporting. More than two-thirds of private equity firms are currently reviewing some or all of their staff expenses. Ensuring consistency will make these checks more effective.

Document everything; show your work
Paper trails are key to a smooth-running Securities and Exchange Commission exam, regardless of the issue being investigated. When conducting valuations, for example, it is essential everyone involved in the process understands how the valuation was reached, and can explain why the process is considered valid. Detail your methodology, and more importantly, ensure that you are following it to the letter.

The General Data Protection Regulation is coming
Any private equity firm with EU exposure must begin preparing for the 2018 entry into force of the GDPR now. The EU legislation is more far-reaching than any North American data protection rules, and the penalties for non-compliance or a breach are severe; the equivalent of 4 percent of global annual turnover. Any firm holding data on any customer in the EU will be impacted by the regulation.

Simply considering broker-dealer registration may be enough
The SEC is not thought to be prioritizing broker-dealer registration crackdowns. But this could change, so a firm should be able to provide evidence it has assessed whether or not it should register – even if the conclusion was negative. The SEC is expected to deliver further guidance on broker-dealer registration before the year-end.