Demystifying the New Rules for Private Fund Advisors

  • Private equity
  • 8/30/2023

Last week the SEC released sweeping new rules for Private Fund Advisers. The industry is currently evaluating the rules and the detailed analysis contained within th...

By: Andrew Huss and Jon Haidet

Last week the SEC released sweeping new rules for Private Fund Advisers. The industry is currently evaluating the rules and the detailed analysis contained within the SEC’s 660-page final rule and will have better clarity on next steps and needed actions in the weeks ahead.

During a first read of the final rule released, my attention was drawn to the numerous settled actions the SEC referenced to support “problematic practices” the need for further Commission oversight. A number of these problematic practices related to the miscalculation of fees, management fee offsets being inaccurately applied or not applied at all, and incorrect or disproportionate allocations of expenses to private fund clients.

While the new Quarterly Statement Rule should provide better transparency into fee calculations to investors in private funds and the new Audit Rule will require that each private fund advised by a SEC-registered adviser undergo an annual audit, advisers should ask themselves what actions they can take to self-identify problematic practices they may be unintentionally committing.

The simple answer to a number of these problems is to understand and follow the governing documents, primarily the Limited Partnership Agreements (“LPAs”) of each private fund they advise. Unfortunately, in practice it is not always that simple.

Having been in the private equity arena for 15+ years and having worked both in-house and as a third-party administrator, I have had the opportunity to see numerous LPAs and fund structures, ranging from simple to complex. I have seen governing documents that are extremely professionally written with clear concepts and free from methodology breaks and other governing documents that are riddled with inconsistencies and contain concepts that may not align with a manager’s intent.

If you are an adviser to a private fund with a simple, well-written LPA, you have less to worry about. On the other hand, if your document includes fee caps, offsets, and unique allocation rules, these need to be shown and discussed with your accounting and compliance teams from the beginning and routinely revisited.

How we can help We strongly recommend bringing a third-party fund administrator into the picture before documents are inked so the administrator can review a fund’s LPA and ask questions about how the fund is intended to administratively operate before the fund launches. A good administrator should be able to gain a clear understanding of what it will take to administer the fund throughout its lifecycle and should help private fund advisers confirm the document aligns with how they intended the fund to operate. Here at CLA, we jump at the opportunity to get involved with our private fund clients before their LPAs are final as we have repeatedly been able to help our clients start off on the right foot and in the right direction.

This blog contains general information and does not constitute the rendering of legal, accounting, investment, tax, or other professional services. Consult with your advisors regarding the applicability of this content to your specific circumstances.

Experience the CLA Promise


Subscribe