By Caitlin Melchior, Senior Director of Industry Strategy
Over the last several quarters, Ontra has been keeping a close eye on the myriad regulatory developments affecting private fund advisers. In the years since I left in-house legal practice, the regulatory environment has only become exponentially more complex, requiring a significant investment in tools, resources, and personnel.
Gone are the days when a dual-hatted CFO/CCO could manage a compliance program alone. Recent changes likely signal good news for CCO job security, but you may be feeling a bit overwhelmed. While the U.S. Court of Appeals for the Fifth Circuit decision invalidating the Private Fund Adviser Rules (PFAR) offers some relief, all signs point to continued SEC scrutiny of private funds.
To help, we’ve compiled a list of the top regulatory developments on our minds this year.
Key regulatory developments
Form PF
On February 8, 2024, the SEC and CFTC adopted amendments to Form PF related to master-feeder arrangements and parallel fund structures. These amendments supplement those adopted on May 3, 2023, and address enhanced reporting, adviser-led secondaries, GP removals, and fund terminations.
Private Fund Adviser Rules
PFAR, introduced by the SEC on August 23, 2023, was subsequently invalidated by the Fifth Circuit on June 5, 2024. While the compliance dates are no longer applicable, the SEC’s introduction of these rules signals an increased interest in fee and expense reporting, secondary transactions, and preferential treatment of investors.
There is considerable uncertainty about what may happen next. Will the SEC appeal the ruling to the Supreme Court? Will it engage in sweep exams on topics covered by the proposed rules? Will it attempt to introduce a more narrow set of rules? Will it legislate by examination?
While firms can likely go pencils down on this specific set of rules, the SEC’s focus on private funds is unlikely to end soon.
Marketing Rule
In 2023, we were all focused on the Marketing Rule. As the SEC begins to examine funds under this new regime, it has issued risk alerts around the use of testimonials, endorsements, and third-party ratings in advertising and marketing materials and announced several enforcement actions.
Enforcement priorities
The SEC has also recently announced sweeps covering the use of artificial intelligence by investment advisers and enforcement actions related to false and misleading claims about the use of AI in investment processes.
The SEC continues to focus on ESG reporting (despite appeals), outsourcing, and custody of assets.
And in a reminder not to sleep on your quarterly and annual compliance reviews, the SEC recently announced enforcement actions resulting in $81M in fines related to off-channel communications.
Corporate Transparency Act
When it comes to Beneficial Ownership Information (BOI) reporting, both the SEC and FinCen have been busy. The SEC adopted Schedule 13D/G amendments in the fall, and the Corporate Transparency Act (CTA) went into effect on January 1, 2024, imposing new requirements that impact private fund advisers. Despite an Alabama ruling, advisers are preparing for CTA compliance dates. New York also recently followed suit with the New York LLC Transparency Act.
What’s next?
Candidly, the complex regulatory framework under which private funds are now operating could occupy several pages (or volumes).
The takeaway is clear: Now is the time to invest in the digital transformation of your compliance program.
Learn more about AI for the private fund lifecycle
Ontra’s AI-powered Legal Operating System for Private Markets has helped automate and streamline mission-critical legal processes across the fund lifecycle for 700+ GPs, investment banks, and advisers, including Blackstone, KKR, Apollo, and Carlyle.
Insight from Ontra is the AI platform powering the private fund lifecycle. Embrace this innovative legal technology to simplify fund management, proactively manage compliance risk, increase transparency, and reduce expenses.
Schedule an Insight demo to see how you could more efficiently manage regulatory compliance and an SEC exam response.
