Private Equity Compliance

A strong compliance program begins with the basics. To that end, we’re covering five compliance basics every private equity adviser needs to know, from registration requirements to fiduciary duty and more.

Registration Requirements

Current regulations require private equity advisers to register unless they meet certain exemptions.

For example, advisers managing “private funds with less than $150 million in assets under management in the United States” are exempt and need not register.

Private equity advisers that cross the $150 million threshold have 90 days from filing their annual amendment to register with the SEC.

Form ADV and Other Documents

Private equity advisers will need to file a Form ADV, which provides general information about the firm, fund and advisers involved. They may also need to file a Form PF. In general, private equity advisers that meet the following criteria must complete Form PF:

• Private equity advisers registered or required to register with the SEC as investment advisers.
• Private equity advisers registered or required to register with the CFTC as a CPO or CTA, who are also registered or required to register with the SEC as investment advisers.
• Manage one or more private funds.
• Collectively, with related persons, have at least $150 million in private fund assets under management as of the last day of the most recently completed fiscal year.

Many private fund advisers meeting the above criteria will only need to complete Section 1 of Form PF and file it annually. However, large private fund advisers must provide additional data. Large hedge fund advisers and large liquidity fund advisers are required to file quarterly. Additionally, large hedge fund advisers must file a current report in Section 5, and advisers to private equity funds must file a current report in Section 6 upon certain reporting events.

Form PF is not public but provides key information about an adviser’s fund size, types of investors, and more. Generally, both Form ADV and Form PF are filed annually, though specific circumstances may require more frequent updates. For example, in 2023, the SEC adopted amendments to Form PF to:

• Require current reporting by large hedge fund advisers regarding certain events that may indicate significant stress at a fund, potentially harming investors or signaling broader financial system risks.
• Require quarterly event reporting for all private equity fund advisers regarding certain events that could raise investor protection issues.
• Require enhanced reporting by large private equity fund advisers to improve the Financial Stability Oversight Council’s (FSOC) ability to monitor systemic risk and help both FSOC and the SEC identify and assess changes in market trends at reporting funds.

Fiduciary Duty

All advisers under SEC regulation, including those governed by the Advisers Act of 1940, are subject to fiduciary duty, and private equity advisers are no exception. According to the SEC, fiduciary duty requires an adviser “to adopt the principal’s goals, trust, objectives, or ends.” This means the adviser must always serve the best interest of their client and not prioritize their own interests over the client’s.

Among other responsibilities, private equity advisers must:

• Provide advice that is in the client’s best interest.
• Avoid and disclose any conflicts of interest.
• Ensure fair and equal treatment across their entire client base.

Chief Compliance Officer

Private equity advisers registered with the SEC must appoint a Chief Compliance Officer (CCO) as part of their regulatory obligations under the Investment Advisers Act of 1940. It is crucial to select a CCO who has a comprehensive understanding of the firm’s operations, extensive knowledge and experience with relevant rules and regulations, and sufficient authority within the firm to enforce the compliance program, policies, and procedures.

Disclosures

The SEC updated rules pertaining to private equity advisers, many of which center on disclosure requirements.

Now, all private equity advisers (whether registered or exempt) must:

• Disclose and obtain majority consent to charge or allocate to the private fund any fees or expenses associated with an investigation of the adviser.
• Disclose the charging or allocation of regulatory, examination or compliance fees incurred by the adviser or its related persons to the private fund on a quarterly basis.
• Disclose to investors the pre-tax and post-tax amount of a clawback of certain taxes from the private fund.
• Disclose to and gain consent from investors to borrow or receive an extension of credit from a private fund.

The Rule also includes requirements and instructions for quarterly performance statements and an annual audit (which will need to be conducted by an independent public accountant and on a “surprise” basis).

Private fund compliance differs from registered investment advisers compliance in several ways – but with a strong foundation of applicable regulations, private equity advisers can build an effective compliance program.