Fees and expenses revised on increased SEC scrutiny

Two-thirds of private fund firms have revised their fees and expenses policies since the Securities and Exchange Commission published details of its enforcement action taken on the issue, a survey has shown.

The poll was taken during a discussion on private equity fees and the SEC at Thursday's Private Equity International CFO and COO forum in New York.

Panelists said in their cases, revisions to fees and expenses policies were largely language-related, and made to improve consistency and clarity.

“We made some amendments, which were previewed by investors, and created more consistency in the language [within the documentation] across all funds. If the SEC sees the same thing over and over, they're likely to stop looking,” one panelist, who is a CFO, told delegates.

A second panelist, a chief compliance counsel, said his firm had taken similar action and tried to be more specific over certain details, but added it's impossible to cover every eventuality.

“We also saw more demand from investors for more detail on fees and expenses policies following enforcement action,” the panelist said. “It was an opportunity for us to clarify our stance, and for them to gain clarity on the matter.”

While there has been widespread fees and expenses policy revision, far fewer delegates polled – 16 percent – said their firm had made coincidental changes to the LP Agreement.

“Many LPAs pre-date regulation and [SEC] registration. They often don't need changing, some things can simply be clarified. Frequent amendments are really not favorable,” a second CFO said.

But another panelist, whose firm was examined by the SEC, said aggressive amendments were made to the LPA ahead of the exam.

“We looked at fee monitoring, and broken deal financing and it lead to us giving a large reimbursement to the fund,” the panelist said.

He said the changes helped set the tone for the next fund, but added the extent to which it is worth changing the LPA is dependent on the type of fund being operated, and where it is in its lifecycle.