Victoria Langley When the U.S. Securities and Exchange Commission (SEC) set 12- and 18-month compliance dates for its private fund adviser reforms, it looked like firms had plenty of time to get ready. But the deadlines are fast approaching, and if your firm has $1.5 billion or more in private funds assets under management (AUM), you’re speeding toward the September 14, 2024 compliance deadline.
It’s become obvious since the reforms dropped that traditional methods of handling compliance aren’t enough anymore. Massive spreadsheets and manual tasks are time-consuming and leave too much room for error, particularly as side letters become more complex and you face several new fee and expense-related rules.
As a private fund adviser, you have to find the technology tools, processes, and procedures that make proactive compliance possible. If you don’t embrace a high-tech way of doing things, your firm could run the risk of an SEC enforcement action.
New fee & expense rules and workflows
In addition to fee and expense provisions in side letters, you’ll soon have several new SEC rules impacting your fee and expense tasks:
The Restricted Activities Rule:
Limits how all private fund advisers can charge and allocate certain types of expenses. You may not engage in certain activities contrary to the public interest and the protection of investors unless you provide certain disclosures to investors and, in some cases, receive investor consent.
The Quarterly Statement Rule:
Registered private fund advisers must distribute quarterly statements to investors with additional information about fees and expenses paid by the fund. Your quarterly statements must list fees and expenses as separate line items by total dollar amount per specific category. You can’t exclude de minimis expenses, group smaller expenses into broad categories, or label expenses as miscellaneous.
The Private Fund Audit Rule:
Registered private fund advisers must obtain an annual financial statement audit that meets the requirements of the audit provision in the Custody Rule for each private fund. You must deliver the audited financial statements to investors each year within 120 days of the private fund’s fiscal year-end and promptly after liquidation.
5 ways to prepare for increased fee & expense scrutiny
1. Adopt obligation management software
You’ll want industry-specific legal tech to support your compliance workflows. The countdown to compliance is on, and you only have so much time to fully meet your new obligations. Now isn’t the time for slow, manual processes.
Insight by Ontra, a robust, AI-powered obligation management system, offers greater transparency into your fund documents, documents compliance workflows, and eases the process of responding to an SEC exam.
2. Tag fee & expense provisions in side letters
Insight’s tagging feature is crucial to your investor obligation and regulatory compliance workflows. You can search and label fee and expense-related provisions across all side letters for all funds, establishing a quick way to monitor the differences among your limited partners (LPs).
3. Assign accountability for all fee & expense deliverables
Ensure your firm delivers on its fee and expense obligations to investors and the SEC by using Insight’s Task and Subtask features. Insight lets you create multi-stakeholder workflows by assigning one-time and recurring tasks. As individuals mark tasks complete, your firm gains an auditable, time-based log of events documenting its compliance processes.
4. Perform quarterly compliance checks
Your new rules and processes demand monitoring; otherwise, you run the risk of not fully implementing the plan you put to paper. Perform quarterly compliance checks with regard to fee and expense provisions, restricted activities, and preferential side letter provisions. Consistent monitoring is an effective way to ensure your firm provides necessary disclosures and statements to investors.
5. Proactively prepare to respond to the SEC
You want to be able to respond to an SEC request for documents quickly and comprehensively. To prepare for an SEC exam, document the policies and procedures related to fee and expense allocation, and maintain a digital record of compliance that your firm can easily share with regulators. You can export fund documents and data from Insight in just a few clicks to establish your side letter compliance.
The SEC wants proactive compliance
The SEC’s own language speaks directly to the need for general partners (GPs) to adopt a proactive compliance program that encompasses identifying all relevant fee and expense provisions, assigning accountability for associated deliverables, and maintaining a comprehensive audit trail of compliance with such provisions. However, due to the nuanced and complex nature of fund documentation, historically, you haven’t had a dedicated tool to help you efficiently and effectively manage your investor obligations and compliance workflows.
With Insight by Ontra, you can organize and actively manage obligations to your investors across all your funds in one centralized platform. Purpose-built to address the exact needs of GPs and the unique complexities of private funds documentation, Insight enables you to easily upload fund documentation, search and label obligations, and assign owners to key workflows.
Leading GPs already use Insight to optimize their fund and regulatory compliance programs, drive organizational accountability, reduce regulatory risk, and strengthen investor relationships. Don’t fall behind when compliance matters most.
