As the SEC ruling continues to send shockwaves through the private fund industry in the US, and trade groups attempt to block the fee disclosure ruling, we look at the reporting requirements for registered private fund advisors, and how to improve transparency in investor reporting.
On the 23rd August 2023, the U.S. Securities and Exchange Commission (SEC), voted to adopt significant new rules applicable to private fund advisors, the full details of which can be found in the official 660-page report. While the SEC did not implement all its original proposals, analysts agree that these are still the most sweeping changes to private markets since the Dodd-Frank Act following the 2007-8 financial crisis.
Quarterly statement rule
Transparency around fees and expenses associated with private funds has been one of the primary concerns for both investors and managers, hence SEC registered investment managers will now be expected to:
- Supply investors quarterly statements detailing all performance, fees, and expenses.
- Comply with rules that look to standardize the formatting and frequency of reports.
- Statements should employ straightforward, succinct language and be formatted in a way that enables investors to effortlessly compare fees, expenses, and performance for each quarter.
- Disclose how waivers, payments, rebates, offsets and expenses are calculated and explain the structure and method used to determine performance-based compensation such as the distribution waterfall.
- Submit reports within 45 days following the conclusion of the first three fiscal quarters of each fiscal year for every private fund, and within 90 days following the conclusion of each fiscal year for every private fund. Fund-of-funds: 75 days after the conclusion of the first three fiscal quarters and 120 days after the end of the fiscal year.
- Statements should incorporate cross-references to the pertinent sections within the private fund’s organizational and offering documents that outline the calculation methods relevant to expenses, payments, allocations, rebates, waivers, and offsets.
- Fund managers registered with the SEC must comply with the new quarterly reporting rules within 18 months of their publication.
For more details on these requirements, read this client alert from Ropes & Gray.
For information on specific requirements for ERAs, read this summary from Jackson Walker.
Standardization requirements
In addition, RIAs managing private funds will now have an obligation to create and distribute quarterly reports that encompass the following three standardized tables:
- Fund-level information
- Portfolio investments generating special fees
- Fund performance
For more details on these requirements, see this excellent analysis from JD Supra.
Transparency through automation
Although most GPs already provide quarterly statements, these new requirements go far beyond what managers have had to historically produce. If fund managers are still using manual processes such as spreadsheets to calculate distribution waterfalls, they may struggle to explain their methodology for any performance-based compensation payments.
“Regardless of whether you agree or disagree with these SEC rulings, the shift towards increased investor transparency is here to stay, so to avoid regulatory headaches the sensible option is to start preparing now and take advantage of technology which can make your life easier” Oliver Freigang, CEO & Founder, qashqade.
SaaS solutions such as qashqade facilitate investor transparency through accurate and flexible calculation and reporting, agnostic of asset class. If you’re looking to prepare for these new SEC regulations, then get in touch today to see how we can help.
