According to reports, the Securities and Exchange Commission's (SEC) enforcement unit sent letters to several private equity firms seeking certain information as part of an "informal inquiry" into the industry. It appears the SEC is attempting to gather information from various private equity firms in an attempt to better understand how the firms value their investments and report performance to investors. Sources familiar with the inquiry say that the SEC is concerned that certain firms may exaggerate their portfolio valuations in order to attract future investors.
Several private equity firms are already under the purview of the SEC because they have gone public and are obliged to supply detailed financial information like other public companies. However, for those who are not, most private equity firms must register with the SEC by the end of March as part of the new Dodd-Frank financial reform act.
Speaking at a private equity conference in January, Robert B. Kaplan, co-chief of the SEC enforcement division's asset management unit, said that the private equity industry needed more scrutiny. Kaplan emphasized the current lack of oversight. According to reports, the SEC would like to focus on how the industry conducts portfolio evaluation. Private equity funds use complex methodologies to value their holdings and because there are no easily obtainable market prices for many private companies, subjective judgment plays a large role in valuing a holding. ("Private Equity Industry Attracts S.E.C. Scrutiny," The New York Times, February 12, 2012).