What sets a small private equity (PE) or hedge fund apart from the big ones? Aside from regulatory assets under management (RAUM), the key difference is the size of their internal teams.
For larger private funds, high RAUMs often translate into higher staffing needs and, thus, an increased number of employees to monitor, trades to verify, and lists to maintain. If your firm maintains a high staff count (over 100 employees), it’s likely that the compliance concerns you face on a regular basis differ greatly from the five-person firm operating down the street.
Related: Investment Adviser Industry Snapshot: Private Equity Funds in 2023
As we move further into 2024, it’s critical that your firm recognizes the regulatory concerns specific to your staff size and creates a compliance program that supports sustainable success and growth. To help you get started, we’re providing a list of the five top compliance concerns facing large PE funds.
5 Top Compliance Concerns for Large Private Equity and Hedge Funds
As a firm with a substantial internal team, you may experience unique compliance risks associated with more complex operations, such as valuations, trade monitoring, risk management, cybersecurity, and more:
1. Valuations, Fees, and Expenses
In 2020, the SEC issued a risk alert outlining several common deficiencies associated with private fund fees and expenses. In particular, the alert noted that firms should ensure fees and expenses are properly allocated between the adviser and the funds it manages in accordance with the limited partnership agreement.
Additionally, the SEC warned private funds to focus on accurate valuations to avoid inaccuracy in management fees charged or performance reported. Valuation may be more difficult for your firm as the number of your funds and/or RAUM grow.
2. Form ADVs and Form PFs
If you’re your firm’s RAUM is above $150 million you will be required to register with the SEC and file a recently amended Form PF, in addition to your Form ADV submission requirements.
You can find a more detailed description of the Form PF amendments here.
3. Employee Trade Monitoring, Conflicts of Interest, and Personal Investments
Mitigating conflicts of interest and managing employee trade monitoring becomes increasingly complex for your firm as staff increases. Strict reporting, pre-clearance policies and restrictions on trading are essential, especially when your employees (or their family members) hold or wish to invest in securities that overlap with the firm’s holdings.
Related: OCIE Issues Risk Alert on Private Fund Adviser Exam Deficiencies – Conflicts of Interest
You’ll also need to ensure that any conflicts of interest are disclosed and mitigated in the event that multiple funds are investing in the same portfolio company.
4. Chief Compliance Officers (CCOs) and Compliance Costs
The scalability of compliance poses a significant obstacle for your large private equity or hedge fund. You’ll need a full-time, dedicated CCO, often in addition to a larger compliance team, to keep up with regulatory demands.
Your CCO will likely need access to technological tools that can make overseeing and training such a large team possible. For example, automating trade monitoring or implementing a digital-first compliance training program.
The costs associated with developing and maintaining compliance, from your CCOs salary to third-party vendors and more, will be substantial. In fact, Glassdoor reports that the median pay for a CCO in the United States is about $271,773. Moreover, the recent reporting amendments mentioned in section two (Form ADVs and Form PFs) are expected to cost private equity firms and hedge funds nearly $2 billion.
5. Cybersecurity and Tracking Employee Activity
Larger firms with valuable investor and financial data become prime targets for cyberattacks. And with a large team, you increase your risk of human error through inadequate password protection, use of personal devices, chances of falling victim to e-mail phishing scams and more.
To protect your firm, it’s important to invest in ongoing training for your staff, as well as regular risk assessments, robust cybersecurity policies, and incident response plans.
Related: Five FAQs About Creating Your Firm’s Cybersecurity Compliance Program
Large-scale or enterprise-level private funds face particular challenges when it comes to regulatory compliance. However, with a strong understanding and focus on these five core compliance areas, your firm can build a sustainable compliance program to support your large team.
Private Fund Compliance with COMPLY
COMPLY offers consulting and technology solutions to help private funds navigate the regulatory and compliance space so compliance teams can focus more time on growth-oriented tasks.
COMPLY’s innovative technology solutions seamlessly integrate with your existing systems, allowing you to build customized workflows, gain valuable data insights, and effectively track potential conflicts of interest. With our software, you can show a commitment to transparency and efficient compliance practices, fostering trust with clients, regulators, and other stakeholders.
Furthermore, the Changes on the Horizon for PE Dealmakers report with insight derived from PitchBook data provides insight into how increased deal flow in 2024 may strain resources, create a greater need for RegTech, and much more!
By partnering with COMPLY, you gain the expertise, resources, and technology needed to comply with confidence and maintain a culture of compliance within your organization.
Ready to explore how COMPLY can help your private equity firm? Let’s talk!