The New SEC Rule for Private Fund Advisors

Regulation of private funds — including private equity, private credit, and hedge funds — has topped the SEC’s examination priorities list for two years running.

To enhance protection for private fund investors, the federal regulator said it would focus on compliance programs, fees and expenses, custody, fund audits, valuation, conflicts of interest, and disclosures of investment risks.

True to promise, the SEC has steadily rolled out new guidelines and regulations, from modernized marketing rules to Form PF reporting. Guidelines for Form PF require funds to file a report detailing trigger events within 60 days of each fiscal quarter end. As markets mature – estimates for fund growth exceed $20 trillion in capital¹ – GPs face heightened pressure to deliver greater transparency.

The latest rule to enhance oversight of private fund advisors is sending ripples across the industry. The SEC rule finalized in August 2023 and set to begin 60 days after publication in the federal register aims to safeguard investors by increasing transparency, competition, and efficiency. SEC-registered advisors will be required to give investors quarterly statements detailing certain information on fund fees, expenses, and performance. In addition, advisors must distribute annual financial statement audits for each fund they advise. In connection with an advisor-led secondary transaction, advisors must also share a fairness or valuation opinion with their investors.

As our subject-matter experts emphasize, it’s important to note the new SEC rule is not entirely prescriptive. While it lays out some specific requirements, a significant portion of the “rules” leave room for interpretation. Still, the changes have far-reaching implications for funds.

Fund Implications

Technology and data management will play equally important roles in helping firms provide the required level of detail and adhere to reporting timelines. As an example of a critical change, funds must report metrics like IRRs at the deal level. Before the rule change, advisors reported this metric at the fund level. The shift will require managers to develop new methodologies to allocate fees, management costs, and carried interest — all while ensuring transparency and compliance.

This is where the interpretation begins. Fund managers need to determine how to execute changes in a scalable and systematic way with a clear audit trail. That’s just the tip of the iceberg. There are numerous other aspects of the rule impacting fund managers and the way they operate. Robust solutions are key to addressing these implications. Real-time data and powerful technology can prepare fund managers to meet new reporting obligations, from quarterly statements to disclose valuation, management and incentive fees, fund expenses, and more.

The Role of Data and Technology

The SEC’s new rule for private funds is shaking up the industry. While the rule itself is not entirely prescriptive, the implications are far-reaching, and fund managers need to adapt.

Arcesium’s data platform purpose-built for the investments industry is engineered to provide a synchronized source of data – delivering a holistic view of a firm’s investments across multiple asset classes, fund products, and distribution channels. Our unified data platform is built to ingest, validate, harmonize, and distribute investment lifecycle data and can be extended per each fund’s needs. We designed our powerful data validation tools to deliver a golden source of truth that’s consistent, auditable, and readily available to enable firms to scale operations and swiftly respond to reporting obligations.

Explore our website to learn more about Arcesium’s capabilities for private markets investors.

Authors:

Cesar Estrada, Private Markets Segment Head
Ted O’Connor, Senior Vice President, Business Development

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