Given the expanding market share of today’s private equity industry, regulatory scrutiny is also advancing on several fronts. In FY 2018, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations completed more than 3,150 examinations – representing a 10% increase over the prior year – and is now following through on previously announced top priorities for 2019. In this new environment of heightened scrutiny, staying protected is even more important. Follow along as we outline seven ways for private equity firms to mitigate regulatory risk.
- Uphold full disclosure.
- Disclose all material information to investors, including conflicts of interest, at the time they invest.
- Adopt and implement written policies and procedures reasonably designed to prevent after-the-fact actions or less-than-adequate consent.
- Embolden the CCO
- Steer clear of the “dual-hat” model of the past, in which an executive or general counsel of a firm also acted as corporate compliance officer – in addition to other duties.
- Designate a dedicated CCO and enforce a separation of powers that ensures independence between the CCO and other management.
- Review know-your-client rules
- Create a system to verify that investors are who they say they are, confirm investing suitability, and validate that there is no involvement in criminal behavior, money-laundering, or entities under sanction.
- Require firm and fund managers to know exactly who has authority to act on a client’s behalf – no internal “bad actors” or unaccredited administrators.
- Maintain records of decisions – whether to clear or reject investors or managers.
- Strengthen cybersecurity
- Carefully review written policies and procedures designed to prevent and detect cyber breaches.
- Monitor preparedness by focusing specifically on governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.
- Guard against overvaluations
- Examine overly optimistic valuations, which can lead to inflated expectations.
- Understand that outcomes of such “unicorns” (startups typically valued at $1 billion or more) may spark regulatory attention – as well as potential private litigation claims.
- Count on blockchain-based scrutiny
- Be aware that uncertainty continues as regulatory framework develops.
- Expect continued inquiries over anti-fraud and registration violations involving initial coin offerings and cryptocurrencies in particular.
- Understand the legal threats of a portfolio company
- Recognize that ownership stake and sale of a portfolio company can expose firms and funds to litigation – whether initiated by a third party or the portfolio company itself.
- Thoroughly review insurance policy coverage and limits to protect against this potentially substantial risk.
This website is general in nature, and is provided as a courtesy to you. Information is accurate to the best of Liberty Mutual’s knowledge, but companies and individuals should not rely on it to prevent and mitigate all risks as an explanation of coverage or benefits under an insurance policy. Consult your professional advisor regarding your particular facts and circumstance. By citing external authorities or linking to other websites, Liberty Mutual is not endorsing them.