Delegates gathered in New York this week for the ninth annual Private Fund Compliance Forum, hosted by pfm. For over a day-and-a-half some of the industry’s leading compliance professionals dug into the issues facing private funds today, from Securities and Exchange Commission exams to running multi-strategy funds to the influence of tax reform.

A recurring talking point was the SEC’s continued acute focus on how fees and expenses are allocated. Of those in the audience whose firms had been examined by the regulator, 50 percent received a comment on fee or expense allocations. Many firms are carefully tracking their allocations – more than 50 percent of those polled at the forum indicated they conducted testing on them once a year. On the other hand, 9 percent said they never conducted such testing.

Fee and expense policies should be thought out, documented and applied consistently. Panelists acknowledged that while most expenses are easily identified and allocated, there are inevitably some grey areas, for example a trip that includes attending an annual meeting, meeting with investors and visiting a portfolio company. Such cases mean compliance officers have to use their judgement, but they will generally be able to defend the decision if it is clearly thought through and demonstrates a reasonable approach.

Funds can expect the regulator to request detailed information on how expenses are allocated, down to asking for lists of the passengers on private jets.

Firms that have been examined by the SEC once shouldn’t rest on their laurels; it’s pretty much a certainty they will be examined again at some point. Ken Joseph, the former head of the SEC’s New York regional office investment management examination program, now managing director at Duff & Phelps, told compliance professionals that they need to stay vigilant.

Joseph added CCOs need to take all reasonable steps to fulfill compliance responsibilities.

“Ensure that conflicts are disclosed and mitigated, that financial charges to client funds are accurate and consistent with the disclosures, and that required reviews are being conducted at least annually by competent persons.

“While I don’t think there’s a target on anybody’s back, the enforcement climate today is to hold individuals liable for violations. CCOs and others in the control chain should be aware of this and, at a minimum, ensure that there is an unwavering culture of compliance, and that the resources devoted to the compliance functions are right-sized to the risks of the business.”

Compliance officers have no room for complacency.