By now, a lot of private equity firms have resigned themselves to the requirements of being registered with the Securities and Exchange Commission, but that doesn’t mean the regulator can’t find room for improvement during an exam. Although currently, such critiques are more specific, and in many ways, easier to address.

Often that means clarifying language in valuation policies and the limited partnership agreement, or ensuring the website doesn’t contradict more formal governing documents. Rarely does this mean amending the LPA, but GPs will update their ADV filing, and ensure the next fund’s agreements include that “upgraded” language. GPs and their counsel will push back on certain criticisms, but in most cases, they will make real changes to stay in the regulator’s good graces.

That’s easier to do, as many firms have improved their documents to meet the requirements of being registered. “After the initial wave of registrations, from 2012 to 2015, PE advisors didn’t know what the issues were,” says Alpa Patel of the law firm Kirkland & Ellis. “But thanks to the exams, enforcement actions and speeches from the SEC, documents for funds launching today are more substantial, more detailed, than ever before.”

To the letter

This doesn’t mean every firm gets an ‘A.’ According to the pfm Fee and Expenses Benchmarking Survey, plenty of GPs revise their documents after a SEC visit. Forty percent of survey respondents changed their valuation policies, while 37.5 percent changed the language of the next fund’s LPA, and the same percentage revised their website. Just 21.8 percent changed documents concerning IT systems, and only 12.5 percent changed outside vendor contracts. So what kinds of changes are GPs making to these documents to keep regulators happy?

“Common deficiencies tend to be granular,” says Julie Riewe of Debevoise & Plimpton. “For better or worse, the SEC is getting into the guts of what a GP has actually been doing.” According to several law firms, the changes tend to be centered around three main categories: compliance policies and procedures, internal controls, and oversight procedures for third-party administrators and service providers.

More often than not, the deficiencies will be addressed with everything short of amending an existing LPA. “A huge focus for the SEC is fees and expenses,” says Greg Merz of Gibson Dunn. “So what often happens when a deficiency is identified is that the firm will put into place enhanced internal controls and disclosure policies, update the next ADV filing, and then ensure those changes are reflected in the next fund’s governing docs. If need be, they will repay the fund any relevant fees.”

One lawyer recalls a client that received a terse letter from the regulator over the allocation of some fees related to an annual meeting, and, as a result, the firm settled on changing the policy and paying a portion of those fees back.

A matter of clarity

Most of the time, changes in documentation are far less serious, and often merely a matter of clarifying the process, especially when it comes to valuation policies. “The SEC isn’t about validating a particular valuation methodology,” says Patel. “They’re going to want to ensure that a firm is actually following the valuation policies that are spelled out in black and white and whether those policies are generally reasonable in the applicable context.”

Other common changes include aligning the language on the firm’s website with its governing documents. “Sites will sometimes have to be edited to comply with the Advisers Act rules, especially if specific internal rates of return are cited,” says Nabil Sabki of Latham & Watkins. GPs may scoff at this, but lawyers warn that the SEC visits a firm’s website right after they review the ADV filing.

But some of the time, GPs and counsel will argue that their policies and procedures are adequate and adequately documented. “The staff is reasonable, and often once we cite the relevant text, that’s sufficient,” says Sabki. Given how savvy the regulator is these days, GPs better be able to cite text that’s relevant and substantial.

For additional articles, go to Fees & Expenses Survey 2018 .