Private equity funds have been growing in recent years, increasing in number by over 10% in 2022. With that growth, there are more advisers managing such funds – and more questions surrounding private equity compliance.
But a strong compliance program begins with the basics. To that end, we’re covering five compliance basics every private equity adviser needs to know, from registration requirements to fiduciary duty and more.
Five Compliance Guidelines for Private Equity Advisers
1. Registration Requirements
Prior to the Dodd-Frank Wall Street Reform and Consumer Protection Act, many private equity advisers weren’t required to register with the SEC. However, current regulations require private equity advisers to register unless they meet certain, narrower exemptions.
For example, advisers managing “private funds with less than $150 million in assets under management in the United States” are exempt and need not register.
If you are a private equity adviser and cross that $150 million threshold, you will have 90 days from filing your annual amendment to register.
2. Form ADV and Other Documents
Private equity advisers will need to file a Form ADV, which provides general information about the firm, fund and advisers involved. Larger firms may also need to file a Form PF.
The Form PF isn’t public, but provides key information about the fund’s size, types of investors and more. According to the SEC, a private equity firm should file a Form PF if:
- “The firm is registered or required to federally register with the SEC as investment adviser AND
- the firm manages one or more private funds AND
- the firm (and its related persons) collectively manage at least $150 million in private fund assets under management (“AUM”) as of the last day of the most recently completed fiscal year.”
In general, both the Form ADV and Form PF are filed annually, although specific circumstances may require more frequent updates. For example, in 2023 the SEC adopted amendments to Form PF which:
- “Require current reporting by large hedge fund advisers regarding certain events that may indicate significant stress at a fund that could harm investors or signal risk in the broader financial system;
- Require quarterly event reporting for all private equity fund advisers regarding certain events that could raise investor protection issues; and
- Require enhanced reporting by large private equity fund advisers to improve the ability of the Financial Stability Oversight Council (FSOC) to monitor systemic risk and improve the ability of both FSOC and the Commission to identify and assess changes in market trends at reporting funds.”
3. Fiduciary Duty
All advisers under SEC regulation (and thus the Advisers Act of 1940) are subject to fiduciary duty – and private equity advisers are no different.
The SEC describes: “fiduciary duty requires an adviser ‘to adopt the principal’s goals, trust, objectives, or ends.’ This means the adviser must, at all times, serve the best interest of its client and not subordinate its client’s interest to its own.”
Among other responsibilities, private equity advisers need to provide advice in the client’s best interest, avoid and disclose conflicts of interest and maintain fair and equal treatment across their entire book of clients.
Related: What is the Fiduciary Duty?
4. Chief Compliance Officer
Private equity advisers registered with the SEC are generally required to have a Chief Compliance Officer (“CCO”) as part of their regulatory obligations, per the Investment Advisers Act of 1940.
And even for firms that may not be required to appoint one, a CCO is a great addition to any compliance program. A CCO has the knowledge and authority to guide your compliance, helping to ensure each individual in your firm is up to date on private equity regulations.
If you are looking to appoint someone within your team to be CCO, it’s important to choose an individual with a high-level view of your firm’s operations – although, technically, any employee can be appointed to the position, as long as the employee has sufficient knowledge/experience of rules and regulations, and has sufficient authority within the firm to enforce the firm’s compliance program, as well as its policies & procedures.
Related: Top five dos and don’ts for selecting your RIA chief compliance officer
5. Disclosures
The SEC updated rules pertaining to private equity advisers, many of which center on disclosure requirements.
Related: RIAs: Don’t Ignore the New Private Fund Reforms Rule
Now, all private equity advisers (whether registered or exempt) must:
- Disclose and obtain majority consent to charge or allocate to the private fund any fees or expenses associated with an investigation of the adviser.
- Disclose the charging or allocation of regulatory, examination or compliance fees incurred by the adviser or its related persons to the private fund on a quarterly basis.
- Disclose to investors the pre-tax and post-tax amount of a clawback of certain taxes from the private fund.
- Disclose to and gain consent from investors to borrow or receive an extension of credit from a private fund.
The rule also includes requirements and instructions for quarterly performance statements and an annual audit (which will need to be conducted by an independent public accountant and on a “surprise” basis).
*Note that the above list isn’t exhaustive. You can read a more complete overview here.
Private fund compliance differs from RIA compliance in several ways – but with a strong foundation of private equity regulations, your firm can build an effective compliance program.
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