On June 5, 2024, the U.S. Court of Appeals for the Fifth Circuit struck down new rules for private fund advisers enacted by the SEC. These rules would have significantly expanded the regulatory compliance requirements for private fund advisers (both registered and not registered), emphasizing detailed reporting on fund performance, fees, expenses and Internal Rate of Return, among others. For many private equity, venture capital and private debt fund managers and administrators, these changes presented significant challenges.
But now that the proposed changes have been overturned, what’s next for GPs and fund administrators? The answer is that most of the sector will have to adopt a wait-and-see approach. The SEC might seek another hearing or appeal to the Supreme Court. Although the Private Fund Adviser Rules are off the table for the time being, GPs and advisers alike should keep a close eye on the SEC’s next moves, as these issues may still come up in future examinations.
Despite the ruling, the changes proposed by the SEC provide a good indication of their priorities and areas of future focus. In this blog, our team has prepared a summary of the suggested regulatory changes, as well as an outline of the difficulties they would pose for GPs and fund administrators (including real-life examples).
Understanding the Proposed SEC Rules
Key Disclosure Requirements
The new SEC regulations were to introduce several critical requirements:
- Quarterly Statements: Detailed reports on fund performance, fees, expenses, and compensation.
- Annual Audits: Annual financial statement audits as per the Advisers Act “custody rule”.
- Fairness Opinions for Adviser-Led Secondaries: Obtain and distribute fairness or valuation opinions and disclose material business relationships.
- Restricted Activities: Prohibit certain fee allocations without disclosure and investor consent.
- Preferential Treatment: Ensure fair treatment by disclosing preferential redemption rights and portfolio information to all investors.
Challenges for GPs and Administrators
With an intended March 2025 deadline for the new SEC regulations, General Partners (GPs) and fund administrators were grappling with significant challenges in meeting the enhanced reporting requirements. The detailed and specific nature of the new rules herald a substantial shift from traditional reporting practices. With the deadline no longer looming, GPs and fund administrators were able to heave a sigh of relief; but it’s likely that the proposed changes will come into effect gradually even if not mandated by the SEC. Below is a summary of these challenges:
- Adapting to Detailed Reporting: GPs would have been required to provide more granular data and comprehensive reporting. This transition necessitated a deeper understanding and reworking of existing data management practices. The detailed quarterly and annual reports that were to be mandated by the SEC demanded a level of precision and transparency that many administrators were not used to, requiring significant adjustments in their reporting processes.
- Unclear Scope and Responsibilities: For GPs and administrators, the responsibility for managing data from the inception of the fund often remains ambiguous. This lack of clarity can lead to inefficiencies and confusion, particularly when determining who is accountable for the various aspects of data management and compliance. GPs and administrators needed to establish clear roles and ensure that all necessary data was meticulously captured and maintained throughout the fund’s lifecycle.
- Data Readiness: One of the critical challenges was the readiness of data for extraction and reporting. Existing systems (or spreadsheets) may not be equipped to handle the level of detail required by the proposed regulations, making it difficult to generate the necessary reports accurately and on time. This issue necessitated significant upgrades or overhauls of current data management systems to ensure compliance.
- Increased Manpower Requirements: The additional workload imposed by the proposed disclosure requirements may have required an increase in staffing or a reallocation of existing resources. This need for additional manpower could result in higher operational costs and a strain on current personnel, who may have already be working at full capacity.
Example: Portfolio Reporting – Realized and Unrealized Investments Breakdown
One example to illustrate the added complexity under the proposed new SEC rules is the requirement to separate the Gross IRR and gross MOIC for the realized and unrealized portions of an illiquid fund’s portfolio. This means that the realized and unrealized performance must be reported separately, adding a new layer of detail to the reporting process.
The calculation and grouping of MOIC and IRR, especially when reporting main and parallel investments separately and combined, can be time-consuming. The composition of the realized portfolio may change each quarter, necessitating organized investment cash flows. Furthermore, some LPs may request additional information, such as returns by geography or industry, which can significantly increase the preparation time.
Though these changes will not be mandated by the SEC due to the ruling, this example comes from a real GP client whose LPs have requested the additional detail in these calculations. Such requests are becoming more and more common as institutional investors strive to improve their operational efficiency and their ability to assess fund performance more effectively.
BEFORE
Basic schedule of investments showing unrealized portfolio only with limited disclosure
AFTER
Breakdown of portfolio by realized vs. unrealized with MOIC and Gross IRR by groupings
Quantium’s Solution
At Quantium, we provide advanced tools designed to manage and analyze fund data, enabling GPs and administrators to automate and streamline their reporting processes to ensure your investment operations are future-proof, allowing your data to stand up to the proposed SEC mandates if they come into effect, as well as other regulatory changes that might be introduced.
Our platform offers:
- Data Readiness: Empower GPs and fund administrators to manage their data in a structured and integrated manner, covering investor positions with detailed breakdown, fund and investment cash flows, and IRRs. Our tools ensure data integrity and readiness for detailed reporting.
- Comprehensive Reporting Tools: Utilize our advanced reporting templates and report-building tools to generate the required disclosures seamlessly and accurately.
- Workflow Integration: Whether you are a fund administrator with an existing tech stack, or a GP with outsourced fund administration, Quantium can integrate data with your existing workflows. Our platform offers the option to ingest cash flow data directly from other systems as well as data provided by fund administrators, or to manage the full fund accounting workflow in-house. Our advanced data capabilities provide the flexibility to adapt to your needs, ensuring continuity and efficiency.
Future-proof your investment operations
Despite the uncertainty surrounding the SEC ruling and whether they will appeal the verdict, there is a clear trend within the industry of increasingly complex reporting demands from LPs. The removal of the March 2025 deadline is the perfect time for private funds GPs and fund administrators to conduct a thorough evaluation of their investment operations. Quantium’s software can help you navigate future changes with confidence; ensuring that you can adapt to any new regulations efficiently whether you manage data in-house or through external administrators.
To learn more about how Quantium can assist, send us an e-mail or contact us directly.