Andrew J. Bowden, the Director of the SEC’s Office of Compliance Inspections and Examinations, gave a speech entitled “Spreading Sunshine in Private Equity” in May 2014. While sounding cheery, the “spreading sunshine” metaphor was an ironic evocation of Justice Brandeis’s famous statement that “sunlight is said to be the best of disinfectants” in response to social and industrial diseases.
Mr. Bowden used his “sunshine” speech to catalog a number of maladies purportedly afflicting the venture capital industry. According to Mr. Bowden, the SEC identified violations of law or material weaknesses with respect to expenses, disclosure of fees, marketing and valuation practices, and the implementation of effective policies and procedures to ensure compliance. Venture capital firms should view Mr. Bowden’s speech as a warning to identify and correct deficiencies before a limited partner complains or the SEC commences an examination.
This article addresses a few of the areas that Mr. Bowden identified, including compliance procedures (here we address compliance with the SEC’s pay to play rules) and effective disclosures relating to fund expenses. These topics are important for all venture capital firms, including firms that are exempt reporting advisers under the venture capital exemption. The SEC has enforcement authority over these issues, regardless of whether a venture capital firm is registered as an investment adviser.