CFO Forum: Preparation is key to acing SEC exams

Since the US Securities and Exchange Commission (SEC) announced the National Exam Program in October 2012, every private equity real estate fund manager has been anticipating the day they receive a visit from regulators. At the PERE CFO Forum yesterday, three executives from firms that have been through the presence exam process shared their experiences and offered advice. 

 

“When the caller ID pops up and says ‘US Securities and Exchange Commission,’ there’s a huge knot in your stomach,” commented Doug Cornelius, chief compliance officer at Boston-based real estate investment firm Beacon Capital Partners. Once the call came in January, Beacon had two days to produce initial documents before examiners arrived and stayed onsite for three days, reviewing materials and interviewing team members.

 

Equity International had its presence exam in 2012 just after the program was first announced. The Sam Zell-led firm had one week to upload materials to the SEC’s data management system, then had another weeklong waiting period before the arrival of SEC examiners, according to the firm’s general counsel and chief compliance officer Patrick Kassen. 

 

Columbus, Ohio-based Rockbridge had a similar timeline for its exam. Christopher Dusseau, senior vice president and corporate counsel, found an important part of the examination process was educating the SEC representatives on the real estate industry. “We were the first real estate fund they’d examined, so it was important for us to take charge and frame it the way that we wanted, because, in some ways, we were working with a blank state with regard to their real estate knowledge.”

 

All three panelists noted that the examiners made a point of discussing acquisition fees, which can come across as brokerage activity to those less familiar with the industry. “It’s one of their hot button issues,” said Kassen. “You have to help them understand that it’s real estate and not a security, so the same rules do not apply.”

 

Cornelius noted that, when it comes to the impromptu exam, “the key is preparation.” Beacon conducted a mock examination complete with interviews prior to the call from the SEC, seeing how quickly they could get the documents gathered and the team prepped. He suggested that others do the same and take the time to create an introductory slide deck on the firm in advance. “You’re not going to have the time to put it together later,” he said. “Do it now and update it quarterly.”

 

Dusseau urged firms to prepare by practicing thorough documentation procedures. Examiners surprised Rockbridge when they asked for a years’ worth of documents that predated its registration as an investment advisor. “If you didn’t document it, it didn’t happen,” he said. “Even if your documents are not right 100 percent of the time, being thorough will show that you are thoughtful and consistent.”