“Compliance costs private equity firms about one deal per fund,” asserted Heather Stone, a partner at the law firm of Edwards Wildman Palmer during a webinar entitled “Shifting Regulatory Landscape Focus for Private Equity Funds.” And it does not take a mathematician to figure out that compliance translates to a significant number of lost jobs.
Forty five industry professionals from private capital funds, fund of funds, limited partners, and other industry attended the webinar for updates on regulatory matters, best practices for managing compliance, and using insurance to mitigate related risks.
The panel discussed the “The Small Business Capital and Jobs Preservation Act” recently passed by the House of Representatives that would exempt private equity firms from registration and SEC scrutiny. While the panel did not express much optimism for the bill’s passage in the Senate, there was some hope expressed that Congress might be willing to consider raising registration requirements from $150 MM or to allow small and emerging managers to use registration requirements similar to venture firms. Anne Anquillare, co-founder and CEO of PEF Services, noted that as a fund administrator she sees the burden compliance places on small and emerging managers and how it takes time away from managing the portfolio.
New regulations are making private equity firms more vulnerable to fines and lawsuits. “Private equity firms are under stress,” stated the moderator, Mark Heil, Executive Vice President of PEF Services. “They are adding new employees, software, hiring outsourced solutions and consultants to meet compliance standards.”
Stone provided an overview of the SEC’s efforts in monitoring private equity firms, SEC “hot buttons” and best practices among firms to comply with the new expectations. Michael F., a participant who manages a small fund in connection with a family office, asked her about state and federal registration. (Michael F., was the winner of the Starbuck’s gift card for asking the best question during the webinar.) Heather reviewed the requirements regarding registration and provided some nuances about various states.
Nicole Segal, Senior Vice President of Herbert L. Jamison & Co, LLC, agreed stating that SEC exams, investor lawsuits, and disgruntled employees are increasing the liability for private equity firms. She strongly recommended that private equity firms “know what they have and how you are covered – especially in relationship to professional liability, fidelity bond, cyber liability and employment practices liability insurance. “
As an example of increased risk, the group discussed the recent decision in the Sun Capital case which asked the question whether a private equity fund is responsible for the unfunded liability of a corporate pension fund of one of its portfolio companies under ERISA. Traditionally, investors were not held liable, but the court ruled against Sun Capital because of its controlling position and it was active in the business as demonstrated by the fees that were paid to the fund and used to offset management fees.
The group concluded that the new regulations subject private equity firms to increased risk, with a solid compliance program and proper insurance, those risks can be mitigated. Below you can find PowerPoint, a streamed version of the program and related white papers to the topic.