SEC Enforcement to Focus on Private Equity Insider Trading and Conflicts of Interest

The private equity industry should expect increased scrutiny by the Securities and Exchange Commission (SEC), particularly with respect to insider trading and how firms address conflicts of interest, according to recent speeches by representatives of the SEC Division of Enforcement’s new Asset Management Unit. Moreover, The Wall Street Journal has reported that the SEC has “launched a wide-ranging inquiry into the private equity industry.” [1]

The Enforcement Division’s increasing attention to private equity corresponds with the implementation of new rules under the Dodd-Frank Act that will significantly increase the number of private equity firms subject to SEC regulation as “investment advisers.” The Asset Management Unit, one of a number of specialized enforcement units formed by the Division of Enforcement in 2010 to focus on “priority areas,” [2] is staffed with 65 professionals, including private equity experts.

Once registered as investment advisers, private equity firms must appoint a chief compliance officer and maintain written policies and procedures reasonably designed to prevent violation of the federal securities laws, including laws prohibiting insider trading. According to the SEC Staff, these policies and procedures should also promote compliance with firms’ fiduciary duties and regulatory obligations, including identifying and addressing conflicts of interest.


In the case of insider trading, Robert Kaplan, the co-chief of the Asset Management Unit warned that “we’ve been looking at private equity broadly for a long time. . . . There will be more private equity cases coming from the Division of Enforcement in coming years than there have been previously.” [3] In addition, the Director of the SEC’s Office of Compliance Inspections and Examinations, Carlo di Florio, has also stated that “[o]nce the new registration requirements take effect, our examiners will be on the lookout for registrants that are not diligent about having effective policies and procedures in this important area.” [4]

Opportunities for insider trading identified by the SEC Staff include advance knowledge of going-private transactions or investments in public companies by private equity firms or information learned by a fund manager serving on the board of a portfolio company about public companies that the portfolio company does business with. Private equity firms’ insider trading policies should address these areas of possible abuse and should be “reasonably designed to the scale and level of complexity of the funds they advise for preventing the misuse of material nonpublic information,” according to Mr. di Florio. [5]

The SEC staff has identified potential conflicts creating the greatest risk for investors and has categorized these conflicts by the stage of a private equity fund’s life cycle. These potential conflicts include:


    I'm a corporate lawyer. I work on private equity and venture capital matters, with a focus on mergers and acquisitions, structuring and implementing venture capital investments, joint ventures and technology licensing arrangements, private offerings, and other corporate transactions. I also provide general counsel to public and private companies.
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