The US Securities and Exchange Commission's (SEC) “Spreading Sunshine” speech in early May 2014 heralded a new era of disclosure for private equity firms. Under the spotlight were fees, allocation of expenses, co-investment, deal allocation and other areas of potential investor conflict.

Delivering the speech, Andrew Bowden, Director of the SEC’s Office of Compliance Inspections and Examinations, set out some of the key issues identified by the SEC since it began its inspections of private equity houses in October 2012. Of particular concern to Mr. Bowden and the Commission were the types of fees being charged to portfolio companies, the allocation of these fees between funds and their managers, and investment allocation decisions made by general partners (GP). The latter focused primarily on those decisions relating to co-investment opportunities, but also those connected with the allocation of deals between funds managed by the same sponsor, but with potentially competing mandates.

Unsurprisingly, since the speech GPs have received numerous questionnaires and email requests from investors and gatekeepers. The repeated concern seems to center around the charging of expenses incurred by GPs, where conflicts may arise in respect of which fund or fund vehicle should bear them, and even whether they should be charged to the fund at all.

A clear message has been delivered from the SEC. Areas of concern have been identified and the SEC expects the industry to address them appropriately. GPs can expect rigorous scrutiny of such matters – and pursuit of perceived shortcomings – in the SEC inspection process.

The SEC has also signaled that it is not satisfied with the argument, often presented by GPs and their advisers, that clarity on these issues is provided in the governing documentation of the funds, often negotiated at length and in detail by GPs and their investors. Instead, the SEC wants GPs to disclose how they deal with these issues up-front.

For those in the market, this means in their private placement memorandum and other marketing materials; for those who are not, in their quarterly reporting to investors; and for those who are SEC registered, in their Form ADV.

In tandem with these disclosure requirements, the SEC has also requested detailed breakdowns of invoices issued by service providers to GPs and their funds. It is a move that further highlights the need for GPs to be rigorous in how they procure services and allocate costs, so as to be able to justify decisions to investors and regulators alike.

The regulatory drive for transparency seen in the US is mirrored in much of the EU’s own regulatory agenda, not least by the requirements of the Alternative Investment Fund Managers Directive (AIFMD). This approach will no doubt be adopted by US and non-US investors alike and we expect more requests and requirements from investors on the back of these changes.