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SEC’s Enforcement Director Targets Private Equity 



The SEC’s Director or Enforcement, Andrew Ceresney, announced that the SEC will, and should, continue to scrutinize the private equity industry, while rejecting the industry’s objections.  Mr. Ceresney pronounced the importance for the Enforcement Division “to dedicate resources to this asset class” because retail and retirement investors that invest through institutions need protection because the “investment structure of private equity and nature of private equity investments can lend themselves” to misconduct.  Mr. Ceresney detailed the 8 significant enforcement actions against private equity firms since the passage of the Dodd-Frank Act and warned that more will come.  Specifically, Mr. Ceresney highlighted undisclosed fees and expenses, misallocated expenses, and failures to disclose conflicts of interest.  Mr. Ceresney rejected the industry’s objections to SEC scrutiny and regulation, countering that the SEC should review practices that occurred before registration and eliminate undisclosed conflicts even where investors benefitted.  Mr. Ceresney also warned that firms cannot simply rely on outside counsel opinions because “the adviser is still ultimately responsible for its conduct.”  Mr. Ceresney also opined that the SEC’s actions have brought “real change” to the private equity industry, including prompting institutional investors to scrutinize compliance practices.

OUR TAKE: The SEC is coming, and private equity firms cannot ignore pre-Dodd Frank conduct or rely on permissive outside counsel opinions.  Mr. Ceresney has put every private equity firm on notice that it must implement a real compliance program and hire a qualified Chief Compliance Officer to review past and current conduct and ensure future compliance.  Otherwise, the firm risks SEC sanction and becoming a pariah to institutional investors.