Victoria Langley The SEC adopted private fund adviser reforms in August 2023. For most of the new rules, advisers have until either September 14, 2024, or March 14, 2025, to comply depending on the AUM of private funds advised.
While the rules themselves focus on advisers’ responsibilities, law firms that represent these firms are key players in helping them comply with the SEC reforms and prepare for future SEC exams.
Law firms need digital transformation. With the right technology, law firms can improve how they advise private fund managers, helping clients fulfill regulatory and investor commitments and cooperate with the SEC during exams.
Learn more about the SEC’s private fund adviser reforms and how Insight can help law firms and private funds manage new regulatory compliance requirements.
Current practices that impact SEC compliance
Side letter negotiations
Many private fund advisers rely on outside counsel to manage side letters. During the fundraising process, law firms summarize new or material terms and compare them to precedent for GCs to review. Law firms often handle the negotiation of new side letters with LPs and are responsible for maintaining consistent terms and language across numerous side letters.
Currently, law firms don’t have specific technology to help them negotiate side letter terms and reference precedent. Determining whether terms and language are consistent and favorable is an entirely manual effort.
MFN elections
After the final closing of a fund, law firms often handle the entire MFN process on behalf of their private fund manager clients. Typically, this requires the law firm to create a compendium of all side letter terms for a particular fund. Once complete, law firms reference this compendium to identify the terms that are eligible for election and determine to whom those terms must be offered — another manual process.
Next, the law firm builds several MFN election forms based on investor types and electable terms, then distributes these forms to applicable LPs. This process varies by law firm, with some providing LPs with copies of all side letters, and others providing LPs a list of electable side letter provisions.
Compendia and obligation management
Ultimately, managing compliance with fund and investor obligations is the responsibility of the private fund adviser. However, advisers rely heavily on outside counsel for the initial post-closing compendium, which may take months for the law firm to complete and provide.
For both law firms and fund managers, traditional compendia are cumbersome to navigate and difficult to keep up to date. Compendia only summarize terms and include static references to underlying fund documents and side letters.
Compendia don’t provide information about ongoing compliance and aren’t particularly useful documentation for an annual compliance review, meaning compendia are only a limited part of demonstrating compliance during an SEC exam.
Investor disclosures
In connection with the new private fund adviser reforms, managers will need to disclose preferential terms not just post-closing as part of an MFN election process, but also before and after interim closes. The SEC has not specified the exact form that such disclosure may take.
Some advisers are considering generating disclosure schedules that summarize preferential terms for distribution to LPs. Others are weighing simply distributing redacted side letters to LPs, and relying on LPs to review a lengthy set of documents to understand preferential terms.
In either case, advisers will likely rely heavily on law firms to either produce detailed disclosure schedules or redact side letters prior to distribution. However advisers decide to proceed, law firms will be key to the disclosure process and currently lack a tech-enabled way to manage and distribute required disclosures.
Improve compliance practices with Insight
Insight is a fund obligation management platform that enables law firms and private fund advisers to centralize fund documents, compare and benchmark provisions, and deliver on investor and fund obligations.
Insight replaces a traditional compendium by acting as a secure repository of fund and side letter terms. It enables better and faster document processing, allowing law firms to digitize, extract, and categorize fund and investor commitments from clients’ LPAs, side letters, and other fund documents.
Within Insight, law firms and their clients can:
- Search actual contract language and summary descriptions with SmartSearch.
- Highlight contract clauses and dynamically aggregate related terms with SearchLight.
- Tag and track preferential and other important terms.
- Digitize the MFN election process.
- Assign tasks and subtasks to create efficient obligation management processes.
- Export fund documents and critical side letter data to prepare for and respond to SEC exams.
Benefits of using Insight to support SEC compliance
Lower lift to create the digital compendium: Ontra’s global Legal Network can oversee digitizing LPAs and side letters, summarizing contract terms, and tagging terms.
Provide compendium to clients sooner: While it can take associates months to build a thorough compendium for private fund advisers, Insight’s summaries of terms are ready as soon as the law firm or Legal Network processes fund documents and side letters.
Review precedent during negotiations: Insight provides law firms with a place to quickly search, review, and compare previous contract provisions. These features enable firms to better understand previous terms and language when negotiating new side letters.
Surface preferential terms quickly: For disclosures and the MFN process, law firms are able to quickly surface relevant terms either through search or the robust tagging system.
Respond to complex client questions faster: Private fund advisers will still rely heavily on outside counsel for complex questions, particularly those that require nuanced legal interpretation. With Insight, law firm funds lawyers can search and access fund documentation rapidly, enabling them to quickly find the documentation they need to conduct analysis rather than searching through traditional compendia.
Partner with clients to implement best practices: Insight works most effectively when used by both private fund advisers and their outside counsel. By accessing a central repository, law firms and their clients can better communicate, collaborate, and implement best practices for complying with investor obligations and SEC reforms.
Enable your clients to respond quickly to the SEC: Private fund advisers will eventually be subject to an SEC exam, and when that time comes, law firms want their clients to be able to respond promptly and thoroughly. Insight enables that by providing access to underlying source documents and a way to gather and export information required to demonstrate side letter compliance in seconds.
Stay tuned
Stay tuned for more in-depth information on the new SEC rules and how Insight, Ontra’s AI-backed obligation management platform, can help law firms and private fund managers comply with investor and regulatory obligations.
