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SEC Proposes Streamlining Financial Information for Fund Acquisitions

The SEC has proposed modernizing the financial information for acquisitions and dispositions, including the acquisitions of investment companies. Proposed changes to Regulation S-X and Form N-14 include eliminating certain pro forma financial statement requirements and changing the “significant subsidiary” test. The proposal also includes specific reporting rules for investment companies rather than relying on financial statement requirements generally applicable to the acquisition of operating companies.

Revising the investment company acquisition process should facilitate legitimate transactions while ensuring that shareholders receive relevant, rather than voluminous, financial information.

Private Fund Firm Failed to Timely Deliver Financials to LPs


The SEC censured and fined a private fund manager for failing to timely deliver audited financial statements to limited partners.  Since the firm registered in 2012, it did not meet the 120-day deadline required by the custody rule (206(4)-2) with respect to 178 audits of 440 funds, a 40% failure rate.  In some cases, no financial statements were ever delivered.  The SEC faults the firm for failing to implement required policies and procedures to ensure delivery of the financial statements in accordance with the custody rule even though the firm, for most of the funds, had engaged a PCAOB audit firm to conduct the audits.  The SEC also cites violations of the compliance rule (206(4)-7) for failing to conduct annual reviews of the adequacy and effectiveness of the compliance program.

OUR TAKE: Hire a compliance officer – either in-house or through a compliance services firm.  These types of regulatory missteps can be easily avoided if you retain a professional that knows the rules and has the responsibility and authority to implement them.  If you don’t, you subject your firm to a debilitating and humiliating public enforcement action.

Private Equity Firm Failed to Deliver Financials within 120 Days

 The SEC fined and censured a private equity firm for failing to deliver audited financial statements to limited partners within 120 days of the end of the fiscal year, as required by the custody rule (206(4)-2).  The firm missed the deadline by an average of more than 60 days in every year since it registered in 2012.  Although the staff will give a firm a pass if it misses the deadline due to “unforeseeable circumstances,” the SEC faults the PE firm for failing to make material changes to its compliance processes, thereby leading to a violation in 6 consecutive years.

OUR TAKE: We have found the staff to be fairly reasonable if a firm misses the deadline by a few days because of an unusual event such as a hard-to-value security or a change in auditors.  When you consistently ignore a regulatory requirement and fail to make changes, the Enforcement Division will treat you as a regulatory recidivist and proceed accordingly.