Are You Listening? SEC Offering Risk Management Advice to Newly Registered Private Equity Funds

hedge fund complianceAs readers of my blog may have noticed, Securities and Exchange Commission (SEC) staff has been making the rounds at industry events and conferences in recent weeks. In their remarks, they focused on the SEC’s expectations for newly registered advisers to private equity (PE) funds.

Speaking at the Private Equity International Private Fund Compliance Forum, Carlo V. di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations, raised a number of questions that every PE fund adviser should ask him/herself to evaluate the effectiveness of the risk management structures and processes they have in place:

  • Do the business units manage risks effectively at the fund level in accordance with risk tolerance and appetite set by the key players of the organization?
  • Are the key control, compliance and risk management functions effectively integrated into the structure of the organization while still having the necessary independence, standing and authority to be the watchdog?
  • Does the firm have an independent assurance process, internally or through outside help to independently verify the effectiveness of the firm’s compliance, control and risk management functions?
  • Do senior managers effectively oversee risk management?
  • Does the organization have the proper staffing and structure to adequately set its risk parameters, foster a culture of effective risk management, and oversee risk-based compensations systems and the risk profiles of the firm?

If you ask me, nothing new under the sun—in a nutshell: hire good people, put solid policies and procedures in place and test them, and most importantly, set the right tone from the top!

Let’s see how it all plays out when the rubber hits the road.   An important observation to take away, though, based on all of the recent buzz: the spotlight is on, so be prepared.

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