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Preparing for audits in a complex regulatory environment

After Dodd-Frank required private equity managers to register with the Securities and Exchange Commission (SEC), specialized units within the Division of Enforcement were created to audit funds. In a series of speeches from 2013 to 2016, the SEC showcased increased efforts and activity in regulatory oversight. Notably, the SEC announced approximately a dozen actions against PE firms, with recent penalties totaling nearly $150 million in settled cases.

One of the challenges for both the SEC Enforcement Division and PE funds has been the uptick in investments in recent years. Preqin estimates PE firms managed just $700 billion in 2000 compared to $4.2 trillion in 2015. The sizable increase and the unique characteristics of the industry have sent regulators converging on revolving audit priorities from year to year. Consequently, PE managers have been reactively scrambling to address expense allocations, undisclosed fees, expense shifting, asset valuation, cybersecurity, anti-money laundering, and conflicts of interests.

Because of the broad range of areas that might be covered in an SEC probe, preparing for an audit is challenging and can be disruptive. Still, as articulated by Enforcement Division Director Andrew Ceresney, SEC audits are here to stay: “We have the expertise and will continue to aggressively bring impactful cases in this space. We also hope that our actions send a clear signal to industry participants that their practices must comport with their fiduciary duty and disclosures in their fund organizational documents.” In 2013, 28% of polled PE funds reported being subject to a regulatory audit or examination in the past two years. In 2015, that percentage nearly doubled to 47%.

Difficulties in facing an audit include an inability to manage, organize, and quickly locate data. PE managers must be able to streamline their processes in order to meet heightened regulatory oversight and a broadened spectrum of audit fields. With a highly scalable technology platform that features built-in functions for compliance, data security, and enhanced reporting, NES Financial’s Fund Administration Solution can and should be used to provide a complete audit trail and transparent reporting requests.

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