The Best Defense is a Good Offense: Establishing a Strong Culture of Compliance

By Timothy Mohr, Principal & National Financial Services Advisory leader, BDO Consulting

Private equity fund managers today face an unprecedented flow of regulatory changes, increasing the pressure to enhance compliance and operational systems. New regulations have not only resulted in more firms operating as regulated entities, but also in alterations to private placement exemptions as a product of the JOBS Act. Institutional investors have also begun to increase their scrutiny of private equity funds, looking beyond investment strategies to fully understand fee structures, valuation procedures and oversight processes before making the decision to invest.

Of particular note for private equity fund managers is the “bad actor” rules, which first went into effect in September 2013 and effectively disqualify securities offerings that involve “bad actors” from relying on exemptions from SEC registration under Rule 506. Because of the severe consequences associated with a failure to comply, sophisticated investors now expect private equity firms to provide regular evidence of more rigorous compliance and operational systems, with a special focus on monitoring for regulatory and legal troubles that may trip the “bad actor” rules.

To remain compliant with existing requirements and meet investor expectations, it is now necessary for private equity funds to monitor compliance needs and provide clear, transparent reporting on a regular basis. Establishing these ongoing compliance monitoring processes can both enable accurate and timely reporting and make private equity funds more attractive to investors during fundraising.

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