Andrew Bowden, Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), recently “spread sunshine” on private equity industry practices gathered through so-called “presence exams” of newly registered private fund advisers.

The goal, he said, is to help these advisers spot potential issues before they find themselves in regulatory hot water.  But the “sunshine” may be more like a giant spotlight on private fund advisers, with some storm clouds rolling in on the horizon.

Bowden’s remarks sounded many familiar themes.  Key among them:  transparency and clear disclosure are the surest way to mitigate conflicts of interest.  The unique business model of private equity funds, however, presents unique risks that firms should address.

Among other things, Bowden said, OCIE is concerned about how fees and expenses are allocated between the adviser and the fund, and how allocations are disclosed to investors.  OCIE is also concerned about the lack of clear disclosure regarding valuation procedures, investment strategies and protocols for mitigating conflicts of interest, including investment and co-investment allocations.

According to Bowden, there is work to be done to bring private equity advisers’ controls and disclosures in line with regulatory requirements and investor expectations.  In short, he said, it is not sufficient to just comply with the letter of the law; firms must also treat clients and investors “fairly, equitably, and in accordance with [their] status as [fiduciaries].”

For a more detailed review of Bowden’s remarks, please read our client alert.