An overview of SEC reporting and compliance rules for private fund managers

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The U.S. Securities and Exchange Commission (SEC) has focused on private fund managers for years. The scrutiny began after regulations changed to require most private equity funds to register with the SEC and continued as the private markets grew significantly. Between Q3 2020 and Q3 2021 (the most recent figures), the number of private funds grew from 34,992 to 37,338. During that same time, aggregate private fund gross asset value rose from over $15 trillion to $18 trillion.

Given the SEC’s focus on the private markets, firms must be conscientious about ongoing filing and reporting obligations. They must also be prepared to provide accurate information to the SEC and cooperate with an exam. Anything less could lead to deficiencies and fines as well as damage the firm’s reputation with investors.

The best way for private fund managers to maintain accurate records and prepare for an SEC exam is to use advanced legal technology. Insight by Ontra is an AI-powered SaaS solution built to help fund managers proactively manage the contractual obligations in their fund documentation. It replaces ad hoc tools, giving managers a central location to track their investor obligations, assign ownership of tasks, and build a comprehensive audit trail. Reach out to learn more about Insight.

Below we’ve summarized some key SEC filing and reporting obligations for private funds. Consult your legal counsel for more detail.

SEC reporting requirements for private fund advisers

Public reporting to the SEC

  • Reporting Form for Investment Advisers to Private Funds, Form PF

All SEC-registered investment advisers that manage any number of private funds with at least $150 million in private fund assets under management (AUM) as of the adviser’s most recent fiscal year-end must file Form PF on a quarterly or annual basis. Form PF provides the Financial Stability Oversight Council with data to help it gauge trends and risks in the U.S. financial markets.

The relevant investment advisers can use the Private Fund Reporting Depository to file the initial Form PF and updates. Large hedge fund advisers — those with over $1.5 billion in hedge fund AUM — must file Form PF within 60 calendar days after the end of each quarter. Other advisers must file within 120 days of the end of their fiscal year.

It’s important to note that Form PF may change in the future. Early in 2022, the SEC proposed amendments to the form, which would lower the reporting threshold for large PE advisers, update the existing reporting requirements, and create new reporting requirements for certain events.

  • Uniform Application for Investment Adviser Registration, Form ADV

Registered investment advisers must file Form ADV with the SEC and update it annually or in the event of material changes. Part 1 of the form requires information regarding the adviser’s business, ownership structure, clients, business partners, affiliations, and more.

Part 2 requires advisers to disclose their business practices, fees, conflicts of interest, and disciplinary information in plain English. Advisers must also deliver Part 2 to their clients and make the brochure available to the public through adviserinfo.sec.gov.

In February 2022, the SEC proposed amendments to Form ADV, which, if passed, would require advisers to provide additional information regarding environmental, social, and governance (ESG) factors.

  • Notice of Sale of Securities, Form D

Some advisers may need to file a notice of an exempt offering of securities with the SEC. The SEC requires advisers to file the notice when they sell securities exempt from registration under the Securities Act of 1933 in an offering under Rule 504 or 506 of Regulation D or Section 4(a)(5) of the Act.

The SEC requires advisers to file the notice within 15 days after the first sale of the securities in the offering. Advisers that are actively fundraising must file annual amendments to Form D.

The SEC may also require unregistered advisers to file Form D if the advisers rely on Reg D to offer exempt securities.

  • Beneficial Ownership Reports, Schedules 13D & G

Private equity funds holding equity securities in public companies may have additional reporting requirements, including Schedules 13D or G, Form 13F, and Form 13 H.

Funds that acquire more than 5% of a class of public equity must file a Schedule 13D within 10 days after the acquisition. Alternatively, the fund or adviser may be eligible to file a Schedule 13G, an alternative with fewer reporting requirements, if they meet certain exceptions.

  • Form 13F

Advisers with investment discretion over equity securities in public companies must file Form 13F within 45 days of each quarter-end. Generally, advisers are required to file if funds they advise collectively own more than $100 million of Section 13(f) securities on the last day of any month during the calendar year.

  • Form 13H

Large traders must file Form 13H. The SEC defines large traders as a firm or individual whose transactions in national market system (NMS) securities are equal to or more than two million shares or $20 million during any calendar day or 20 million shares or $200 million during any calendar month.

Private reporting to investors

In addition to Part 2 of Form ADV, the SEC requires advisers to make certain reports to their clients.

  • Audited financial statements

Within 120 days of the end of the fund’s fiscal year, advisers must deliver audited financial statements to their investors. An independent public accountant registered with the Public Company Accounting Oversight Board must audit these statements. Additionally, advisers typically have annual and quarterly reporting requirements defined in their fund documentation.

  • Privacy policy

Registered investment advisers must provide all clients who are natural persons with a summary of their privacy policy every year. There are some exceptions: Advisers don’t have to provide their privacy policy if they don’t share nonpublic personal information with nonaffiliated third parties, and their policies haven’t changed since the last privacy policy distribution.

Additional compliance requirements

Advisers face other requirements that don’t necessitate a specific filing.

  • Compliance review

Best practice is for registered investment advisers to review their compliance policies and procedures annually. For guidance on key focus areas for the SEC, advisers can review an October 2021 Risk Alert that includes the Division of Examination’s observations on frequent deficiencies. When advisers conduct reviews, they should carefully document their compliance practices and the outcomes.

  • Cybersecurity review

The SEC is focused on cybersecurity and included it as an examination focus in 2022. All advisers should carefully review their cybersecurity policies and, if necessary, create or improve them. Advisers can consult the SEC’s August 2017 Risk Alert for guidance.

  • Side letter compliance

Advisers are often subject to additional investor reporting obligations as a result of their specific fund documents and side letter agreements. While a securities law may not explicitly require these reporting obligations, the SEC expects advisers to honor their contractual obligations to investors. Part of the SEC’s increased scrutiny in recent years is ensuring advisers adhere to these agreements.

It’s also important to note the SEC’s proposed amendments to the Investment Advisers Act of 1940 regarding preferential treatment would alter future side letter terms. If passed, the amendments would prohibit certain types of preferential treatment and require advisers to provide all current and prospective investors with information regarding preferential terms in side letters.

SEC compliance challenges for private fund advisers

Managers need to diligently track filing and reporting deadlines to maintain proactive compliance programs. These frequent filing and reporting obligations force managers to continuously maintain updated and accurate information.

Unfortunately, managers often struggle with ongoing reporting requirements because they rely on traditional processes and ad hoc technology solutions. Many managers use manual processes and spreadsheets, which are prone to human error and make efficiently gathering data challenging.

Additionally, it can be time-consuming to maintain audit trails of the managers’ compliance efforts, particularly around contractual obligations, such as those found in fund documents and side letters. Part of the challenge of maintaining an audit trail is the inability to track internal responsibility for tasks. On a practical level, the inability to track internal tasks means important work can fall through the cracks. On a compliance level, the lack of visibility and the possibility of mistakes could complicate an SEC exam and lead to additional scrutiny or, in some cases, fines.

In the event of an SEC exam, managers should be able to quickly respond to requests and produce relevant documents. Inefficient processes, including manual obligation tracking, can slow down managers’ response times and impede their efforts to cooperate with the SEC.

Another challenge managers face in 2022 is preparing for potential regulatory changes. The SEC has made it clear it wants to update the rules and regulations for asset managers in the private markets. For instance, a key proposal currently under consideration is to require advisers to disclose to their investor base any preferential treatment granted to certain investors.

A compliance tool for private markets

While there are effective technology solutions for tracking some aspects of advisers’ compliance programs, particularly regarding trading and gifting policies, a solution for proactively managing private fund agreements presented a challenge for years. That’s changed. Ontra designed Insight as a software solution for managers that must comply with numerous provisions in their fund documentation.

By using natural language processing and other forms of artificial intelligence, Insight turns managers’ key agreements into structured data. As a result, managers can organize, search, and more easily comply with their commitments to investors. The platform becomes the single source of truth for investor obligations.

Another feature of Insight is a comprehensive audit trail. The platform acts as a central repository of fund documentation and contract compliance-related tasks. Each time employees create and complete internal assignments, the platform makes a digital record of the work.

Ultimately, Insight eases the process of maintaining accurate information, complying with SEC reporting requirements, and cooperating with SEC exams.

 

 

Ontra is an alternative legal services provider in the United States. We are not a law firm and do not provide any legal services, legal advice, or referral services. We do not provide any legal representation to clients, nor do we participate in any legal representation of clients.

Take control of your fund obligations with Insight