COMMENT: An SEC prep course

It’s normal to feel nervous about things you can’t control, but SEC exams shouldn’t be one of them.

Few things probably make a general partner as ill at ease as a phone call from the US Securities and Exchange Commission.

A number of speakers at this week’s PERE CFO Forum in New York referred to the feeling “as a knot in your stomach.” An even more visceral image came from Fred Gortner of Paladin Realty Partners, who likened an actual visit from the regulatory agency to a “proctology exam.” 

Colorful as they are, these descriptions aren’t necessarily warranted. When it comes to SEC examinations, private equity real estate firms that are registered investment advisors (RIAs) have a lot more influence over the outcome than they may think.

The more prepared that firms are for the visit, the more likely they’ll score high marks with the SEC. With plenty of preparation, RIAs can ensure that they control the message when meeting with the SEC. GPs have a lot of leeway in this department because – as multiple delegates revealed during the conference – most SEC examiners aren’t experts on real estate and therefore need the firms that they’re visiting to help them get up to speed. Doug Cornelius of Beacon Capital Partners said it best when he remarked: “The key is not treating them as an adversary. You’re there to teach them and guide them.”

In educating the regulator, the best tactic is to keep it simple. But simplifying requires thought and time, particularly when it comes to keeping commonly used industry jargon and technical terminology out of presentation materials. Meanwhile, it’s also important to identify potential red flags and address them beforehand as well. After all, the SEC’s lack of knowledge on the industry also can prove problematic, such as in the case of real estate transaction fees, which the agency may not immediately be able to distinguish from securities-related transaction fees.

While a number of GPs already have survived their SEC exams, a show of hands at the PERE Forum indicated that many other firms still have not. So it’s not too late to drive home one of the main takeaways from the conference: the key to preparing is starting now. Multiple speakers confirmed that the agency was at their firm’s offices within a week or two of calling. That’s hardly sufficient time for a GP to put together its slide deck presentation and assemble all of its documents, as well as ready itself for the myriad questions that the examiners will ask while onsite. 

So, ahead of a call from the SEC, firms should be diligent about documenting all of their investments, accounting and compliance and collecting and storing that information in one place. Firms often win points with the SEC when they respond immediately to the agency’s requests, but they won’t be able to do that if they’re still scrambling to get their act together.

Take PERE’s advice on this one: don’t procrastinate. It won’t just be your stomach that will be grateful when the SEC decides to dial your number.