SECAndrew 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 in controls with respect to expenses in over 50% of the firms reviewed by the SEC during examinations. These specific areas were:

  • The use of consultants, often referred to as “operating partners” in private equity and “venture partners” in venture capital, without disclosing that the funds or the portfolio companies rather than the management company pay the consultants
  • The shifting of expenses from management companies to funds during the course of a fund’s life
  • Automation of certain processes, which advisers use to pass costs from the management company to the funds

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