Private Equity: Staying Ahead of the Game with Strong Compliance Practices

Regulations and compliance

Private equity firms operate in a complex regulatory landscape that varies by jurisdiction, and navigating these regulations can be a challenge. In the United States, the Securities and Exchange Commission (SEC) regulates private equity firms that manage over $150 million in assets under the Investment Advisers Act of 1940. This requires private equity firms to register with the SEC and adhere to certain reporting requirements, including the submission of Form ADV, which provides detailed information about the firm’s business practices, including its ownership structure and fees charged. In addition to these requirements, private equity firms may be subject to other regulations, such as those related to securities offerings, anti-money laundering, and data privacy.

For instance, if a private equity firm engages in broker-dealer activities such as selling securities, it must comply with the rules of the Financial Industry Regulatory Authority (FINRA). Outside of the United States, private equity firms are regulated by various regulatory bodies, such as the Financial Conduct Authority (FCA) in the UK, the Autorité des marchés financiers (AMF) in France, and the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in Germany.

Furthermore, private equity firms are facing increasing scrutiny from policymakers and the public, particularly regarding their impact on the economy and society. In recent years, there have been calls for greater regulation of private equity firms, including proposals to increase transparency and require firms to report on their social and environmental impact. With growing scrutiny from policymakers and the public, private equity firms must be proactive in demonstrating their commitment to compliance and ethical practices.

Here are some tips for navigating the world of regulation in the private equity world:

  1. Stay on top of the regulatory landscape: It’s important to be aware of the regulations that apply to your firm, both domestically and internationally. This includes rules around insider trading, anti-money laundering, and other compliance requirements. Be aware of any changes to the regulatory landscape that could impact your compliance obligations, and make sure that your compliance program is updated accordingly. It is recommended to work closely with regulatory advisors and law firms to stay up to date with the regulatory changes.
  2. Conduct thorough due diligence: Before investing in a company, conduct thorough due diligence to ensure that the investment is legally and ethically sound. This includes checking for any legal or regulatory issues, examining contracts, agreements, and legal documents to ensure that the company is not facing any legal disputes or liabilities that could affect the investment, as well as potential reputational risks.
  3. Establish clear compliance policies and procedures: Develop a comprehensive compliance program that includes policies and procedures for addressing regulatory requirements, as well as training for employees on these policies. This program should be tailored to the specific needs of the private equity firm.
  4. Monitor for potential conflicts of interest: Private equity firms need to be aware of potential conflicts of interest, including situations where they may have a financial interest in a company that conflicts with the interests of their investors. This requires regular monitoring of investments, transactions, and potential conflicts of interest.
  5. Maintain accurate and complete records: Keep detailed records of all transactions and investments, including documentation of due diligence efforts, investment decisions, and compliance procedures. This will be helpful in case of an audit or regulatory inspection.
  6. Engage with regulatory authorities: Develop positive relationships with regulatory authorities and engage with them proactively to demonstrate your commitment to compliance and ethical practices. From the CSSF in Luxembourg that are very approachable and regularly visit companies, to the UK FCA regulators expecting more and more consistent reporting. This engagement will prevent any reputational damages.

By following these tips, private equity firms can ensure that they are operating in a compliant and ethical manner, protecting both their investors and their reputation in the industry. It is important to note that compliance is an ongoing process, and firms should regularly review and update their compliance programs to reflect changes in the regulatory environment and their business practices.

About the author:

Salima Fajal Nanji EMBALJ2022, is an accomplished legal and compliance professional with over 15 years of experience in the Financial Services industry focusing on Alternative Investments, specifically Private Equity and Venture Capital. She has gained extensive legal and compliance experience from successful tenures at industry-leading organizations such as Vistra, Apex Group, and Natixis. Having been shortlisted as the Compliance Lawyer of the Year in 2020, she brings to the table a proven track record of delivering effective guidance and advice to businesses, implementing robust processes, and collaborating with regulators and senior executives.