The private equity industry finds itself on the receiving end of ever-increasing regulatory scrutiny. During 2014 and 2015, the U.S. Securities and Exchange Commission (SEC) brought several significant enforcement actions against private equity firms, targeting fund managers for an array of compliance issues. Private equity firm officers have been individually sanctioned by the SEC, and earlier this year, the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced that it had conducted “presence” exams of approximately 400 private equity advisors. Recent media reports indicate that private equity firms have begun receiving Wells notices regarding compliance issues identified during the OCIE exams, while others are in settlement discussions with the SEC. The government’s focus can be expected to both deepen and broaden as the SEC continues to pursue its stated interest in more closely examining private equity firm operations, fee structures, marketing practices and internal controls.
This elevated level of attention has increased the normal-course scrutiny given to private equity firms’ handling of client assets, management expenses, and potential conflicts of interest. It has also resulted in an increased focus on private equity firms’ international operations and the internal controls they have in place to prevent and detect violations of the Foreign Corrupt Practices Act (FCPA), international sanctions restrictions and other anti-corruption laws. The government has indicated that FCPA compliance throughout the financial industry is a major priority, including investments in foreign portfolio companies and relationships with sovereign wealth funds and other international investors.
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