Thus far, private equity firms and hedge funds that have had to register with the US Securities and Exchange Commission (SEC) under the Dodd-Frank legislation have been under the microscope from the regulator as it examines transparency, particularly on fee arrangments. SEC 'Presence Exam' specialists from the regulator's Private Fund Unit (PFU) have been in to see at least 25 percent of newly-registered private fund advisers. That has meant a knock on the door for companies as the SEC has the power to investigate from within offices of a firm.
Now the specter of a visit has come to real estate advisers in a move signaled by the SEC'S newly appointed chief examiner, Marc Wyatt. In his first speech of his tenure, the SEC's new acting director of the Office of Compliance Exams and Inspections (OCIE) told the annual PEI Private Fund Compliance Forum in New York last month: “The PFU is or will be undertaking exams of real estate private equity advisers,” along with credit advisers, infrastructure and timber advisers, among others. Almost all firms named within the PERE 50 are registered and can therefore be examined.
During the speech, he noted that his team had seen improvement in private fund advisers' fee and expense disclosures, but that more work needed to be done in terms of how GPs disclosed co-investment opportunities to their LPs. He then gave further information about the SEC's recent initiative to examine more private real estate fund managers, focusing on the disclosure of fees and expenses in vertically integrated real estate GPs. Last year, he explained, the SEC's PFU had begun looking at asset classes adjacent to private equity and carried out a review of private equity real estate advisers based on the observation that real estate managers, “especially those executing opportunistic and value-add strategies” tended to be much more vertically integrated than traditional private equity managers.
He said while it found sometimes these ancillary services were indeed not disclosed, a more frequent observation was that investors had allowed the manager to charge additional fees based on the understanding that the fees would be at or below a market rate. “Unfortunately, we rarely saw that the vertically integrated manager was able to substantiate claims that such fees are 'at market or lower.'” He added: “We have seen that the manager collects no data to justify their fees at all. Other times, the data is collected informally through calls to other industry participants and is not documented. Or, when the information is collected, what is presented to investors can be misleading.” Either way, real estate advisers better heed the warning – they are being watched.