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Spot Exam Red Flags before the SEC Examiners

MyComplianceOffice and guest speaker Timothy Goodwin of Blueriver partners presents a discussion from our July webinar on Spot Exam Red Flags before the SEC Examiners.

 

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Timothy Goodwin

Mr. Goodwin has over 13 years of regulatory compliance, internal audit and management experience. Prior to joining Blue River Partners, Mr. Goodwin spent over six years with TPG Capital, LP, a leading global private investment firm with more than $70 billion in assets under management. He most recently served as Director of Enterprise Risk Management and Internal Audit with a focus on documenting and testing TPG’s fee and expense allocations across private equity funds and business platforms.

   

 You can download a full copy of the slides from this webinar.

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Full video transcript available below:

Expenses during SEC Exams

Next slide. I mentioned that the SEC has outlined for the industry what they're looking for. You see the speech there from May of 2016, fairly recent, where the director of the division enforcement came forward and explained exactly what they're looking at when they examine expenses. The top item there is a key one. It's review the general ledger. That is something that we advise everyone to do, in the case of expense allocations. If the SEC is going to be looking at your general ledger to determine how you allocate expenses then you, or someone on your behalf, should probably be doing the same thing before they do. It really is the best, and sometimes only, way to dig in to the detail and really understand how your firm is allocating expenses. Key areas that they said they would focus on is where disclosures are vague or not specific. They'll also request invoices to make sure that the services provided were actually received or rendered. You'll see there the things that they're focusing on. None of those are surprises, all outlined earlier in the enforcement actions that I discussed.

Next slide. Once additional point that the director of division of enforcement made in that speech was some of the unsuccessful arguments that they've heard over the past few years. That first one is key, it seems to have been a surprise to a lot in the industry. That's that in many cases, for instance in the KKR and Blackstone cases, these managers were not registered as investment advisors during the time period for which they ended up having to settle for their misallocation of fees and expenses. Just because it happened before you were registered or a long time ago does not mean that you will be absolved of any bad behavior.

The next point there, investors benefited from the conflict. Also an unsuccessful argument. We really haven't seen an enforcement action there, but I suspect that you can see deficiency letters in cases where there was a conflict that the investor benefited from, but it wasn't disclosed in the relevant offering documents.

The last item there, manager received advice from counsel. It's contradictory to, later on in my presentation when we talk about the correct way to allocate expenses, but that's what the SEC said, just because you receive advice from counsel does not absolve you of your fiduciary duty to your clients.

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