Yes, Your Deal Platform Can Impress SEC Inspectors

Can your deal platform help an SEC exam run smoother? It’s not a typical question private equity dealmakers ask themselves, but at a time when surprise exams are getting tougher, we’ve identified three ways to impress your inspector:

1. Handling Document Requests

“SEC examiners typically expect the private equity firm to produce all necessary documents within two weeks of receiving the request letter, which is sent before the onsite exam,” says Luke Wilson, partner at ACA Compliance Group. “Once on site they expect the firm to have required books and records at their fingertips, usually expecting a 24-hour turnaround following a request for production.”

Deal trails are easy to lose when documents such as CIM and valuation spreadsheets are scattered across the analysts’ computers and outlook.  With the right deal platform, these documents are tied to the same software used for reviewing the deal itself, creating an easy audit trail for others to follow. The examiner can easily see the documents you reviewed at each stage of the deal process from the teaser to the CIM to documents reviewed during final due diligence.

2. Vendor Tracking

Why did you hire this consultant? What’s the price point compared to others? These are just some of the questions SEC examiners would ask to see if a firm fulfilled their fiduciary duty when hiring a vendor. Since due diligence is a common concern for inspectors, firms must prove they hired the best vendor as it relates to their LPs standards. In 2015, the SEC fined Blackstone $39 million for failing to disclose a conflict of interest regarding legal fees from an outside law firm.

It’s important that all contracts and proposals from vendors are stored in one deal platform that shows engagements across the entire firm.  If you hired an accounting firm to perform due diligence on a specific deal, you’ll be able to show the inspector the other proposals you received and justify your decision.  Furthermore, you have a track record of the other projects where you hired this vendor.

3. Reliable Cyber Security

In an environment where cyber threats are becoming more aggressive, it’s imperative for private equity firms to house their deal data in a secure platform. The cost of a breach is more than just a steep fine, it causes investors to lose faith in the firm.

Thus, it’s crucial for private equity firms to choose a trusted cloud platform with state-of-the-art cybersecurity infrastructure. However, this is only the first step.  In a 2019 risk alert, SEC examiners reported that despite paying for a third-party cloud service, many firms don’t take advantage of the full security capabilities the cloud offers.

According to the report, “Although the majority of these network storage solutions offered encryption, password protection, and other security features designed to prevent unauthorized access, examiners observed that firms did not always use the available security features.”

Private equity firms need to make sure they assign personnel to provide oversight when cloud storage is implemented. For example, software patches and upgrades need to be managed to make sure any change doesn’t accidentally weaken the security configuration.

Thankfully, sophisticated deal platforms exist today that can help your firm with compliance requirements. Navatar provides private equity firms with the ability to easily manage their deal documents and vendor information behind a secure cloud network.

Contact me at bbonilla@navatargroup.com to learn more.