In the Spotlight: Private Equity Firms & the Presence Exam Initiative

The question “how are private equity firms doing?” was asked back in 2012 by the Securities and Exchange Commission’s (“SEC’s”) Office of Compliance Inspections and Examinations (“OCIE”),  in response to the growth of this industry. In October 2012, OCIE launched its Presence Exam Initiative (the “Initiative”) for newly registered private equity firms. Now that a year and a half has passed, OCIE Director Andrew Bowden has addressed some of the results and concerns that have arisen thus far in the examination of private equity firms. In this blog post, we will highlight key results and findings provided by Mr. Bowden in his May 6, 2014 speech.

As private equity firms steadily increase their assets under management each year, greater regulation of these entities also has increased. Bowden cites that since the start of the Initiative, more than 150 newly registered private equity firms have been examined by OCIE. This year, the SEC’s goal is to examine 25% of new private fund registrants by the end of 2014. In looking at the results of private equity firm examinations, Bowden outlines three key observations:

  1. Expenses: OCIE examiners have identified “violations of law or material weaknesses in controls” in advisers’ collection of fees and allocation of expenses, with such violations occurring over 50% of the time. Many of the deficiencies, according to Bowden, arise from the use of consultants (also called “Operating Partners”) for portfolio companies, who are not familiar with securities regulation.
  2. Hidden Fees: Fees such as “accelerated monitoring fees”, transaction fees, administrative fees, and party service provider fees – are “hidden” from investors without adequate disclosure.
  3. Marketing and Valuation: Misrepresentations and inconsistencies in marketing continues to be a “key risk”. Specifically, OCIE found problems with materials valuation methodologies, and associated disclosures to investors.

All of these issues, Bowden concludes, can be mitigated through a solid compliance department that is “fully supported” by management and “integrated into a firm’s business” long-term. For further information on this and other related subjects, please contact us at or (619) 298-2880.

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