3 ways to prepare for SEC fee and expense scrutiny now

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Contract Management

Last year was a record-setting year for both global M&A activity and fundraising for alternative strategies. And this historic uptick in activity led to a dramatic increase in the amount of work for general partners (GPs). Their teams, along with outside counsel, had to organize, track, and manage obligations to their limited partners (LPs) in private funds documentation, including Limited Partnership Agreements (LPAs) and side letters.

Simultaneously, the U.S. Securities and Exchange Commission (SEC) has increasingly focused on GPs with inadequate policies or disclosures with respect to their LP relationships. In November 2021, Gary Gensler, the Chairman of the SEC, announced his intention to continue upping scrutiny on side letter provisions — particularly around how private funds allocate fees and expenses across their investor base. The SEC also named private funds an examination priority in 2022.

But the news doesn’t stop there. In early 2022, the SEC voted to propose amendments to the Investment Advisers Act of 1940 and Form PF. These votes signaled the SEC’s intent to regulate previously unregulated private markets.

Learn how Insight from Ontra can help GPs prepare for regulatory scrutiny around fees and expenses.

3 ways to prepare for increased scrutiny on fees and expenses

Image of 3 cards. One: Identify bespoke fee and expense provisions. Two: Assign accountability for all fee and expense deliverabes. Three: Maintain a comprehensive audit trail.

The SEC’s actions are a strong warning to GPs responsible for delivering on the many promises contained in their LPAs and side letters. Given the enhanced scrutiny, GPs would benefit from implementing a robust system of disclosure, organization, and compliance.

GPs that act now to establish a comprehensive compliance program can get ahead of the regulatory curve and prepare for any new requirements. Failing to do so and maintaining immature compliance processes could increase the risk of regulatory scrutiny and fines, reputational damage, and loss of investor trust.

Three steps GPs can take today to prepare for heightened scrutiny are:

Identify bespoke fee and expense provisions

Review fee and expense provisions across all side letters for all funds. Establish a fast and easy way to reference these provisions and understand the nuanced differences among LPs.

Assign accountability for all fee and expense deliverables

Ensure everyone across the organization is delivering on the fee and expense commitments to investors within the contractually agreed deadlines.

Maintain a comprehensive audit trail

Document the policies and procedures related to fee and expense allocation. Maintain a digital record of compliance that the firm can easily share with regulators.

The SEC wants transparency and accountability

The SEC’s own language speaks directly to the need for GPs to adopt a comprehensive system to identify all relevant fee and expense provisions, assign accountability for associated deliverables, and maintain a comprehensive audit trail of compliance with such provisions. However, due to the nuanced and complex nature of fund documentation, asset managers have not had a dedicated tool to help them efficiently and effectively manage their investor obligations… until now.

Insight is the first software solution that allows fund managers to organize and actively manage obligations to their investors across all of their funds in one centralized platform. Purpose-built to address the exact needs of GPs and the unique complexities of private funds documentation, Insight allows GPs to easily upload fund documentation, abstract obligations, and assign owners to key workflows.

Dozens of leading GPs, including Silver Lake, L Catterton, and AllianceBernstein already use Insight to save time and money on fund compliance, drive organizational accountability, reduce regulatory risk, and strengthen investor relationships.

 

This blog was original published November 17, 2021. 

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