SEC unit to increase focus on private equity

The US Securities and Exchange Commission's alternatives investigation unit is ramping up its focus on private equity, including taking a closer look at side letters.

The US Securities and Exchange Commission’s newly formed Asset Management Unit is increasing its focus on the private equity industry, having spent more time in past months on private funds and other alternative asset managers.

The team, formed earlier this year, will be looking into issues of valuation, complex structures and conflicts of interest related to private equity funds, according to Bruce Karpati, co-chief of the SEC’s asset management unit.

“We’re looking at valuation-type issues, including misrepresentations of valuation and performance, and those advisors who may not be following through on their valuation policies and procedures,” Karpati said during the PEI Private Fund Compliance Forum in New York Tuesday.

“It’s not about looking at bad performance, it’s about [GPs who are] misrepresenting performance to their investors,” he said.

The asset management team will also look into side letters that offer “preferential treatment” for some investors over other investors in a fund, Karpati said.

The team has not had a huge focus on private equity so far, spending its time investigating hedge funds and other asset managers.

The SEC unit will investigate both registered and unregistered firms, Karpati said. The US Congress may vote in the next two days to approve registration for private equity firms with assets of $150 million and more.

The SEC’s asset management unit was formed earlier this year, with Karpati and Robert Kaplan named as co-heads. Karpati founded and led the commission’s hedge fund working group, and was an assistant regional director in the SEC’s New York regional office.

In forming the team, the SEC sought to be “as savvy as those we are investigating”, Robert Khuzami, director of the SEC’s enforcement division, said at a past conference.

“Members of the specialized units will acquire the investigative insights that can only be developed by conducting multiple investigations in the same subject area, which will lead to more effective, efficient investigations,” Khuzami said at the time.