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Private Funds Expect to Spend Billions on Compliance with SEC Rule

S.J. Steinhardt
Published Date:
Sep 14, 2023

As the Securities and Exchange Commission (SEC) adopts new requirements for private funds, private equity, venture capital and hedge fund groups are preparing to spend billions of dollars on compliance and legal advice, The Financial Times (FT) reported.

Private funds manage more than $25 trillion in gross assets for pension plans, university endowments and wealthy individuals, The Wall Street Journal has reported. The new rules and rule amendments are intended “to enhance the regulation of private fund advisers and update the existing compliance rule that applies to all investment advisers and “are designed to protect private fund investors by increasing transparency, competition, and efficiency in the private funds market,” the SEC said on Aug. 23.

In response, larger firms are considering recruiting more staff, such as their first full-time general counsels and chief compliance officers, as well as hiring lawyers with specialized expertise in the new rules, the FT reported, and the entire industry is preparing to invest more in compliance and reporting technology.

As part of its rulemaking process, the SEC estimated that new requirements for audit statements and quarterly performance reports would cost the industry $961 million annually and that regulations on unequal treatment of investors, as well as extra staff and legal costs connected to disclosures around fund expenses, would cost another $938 million.

To hire up for the new rules, private fund managers are likely to recruit from legal and compliance departments at traditional asset managers and banks, as well as from the SEC itself, the FT reported. Compliance experts are particularly in demand.

“Stakeholder management is increasingly sought after by the business as they bring in new compliance and risk management people,” said Ellen Yaffe, a partner at corporate recruiter Russell Reynolds’ financial services practice, in an interview with the FT. “Funds are going to want fees to be explained in ways that clients accept them.”

Fund managers will have to figure out how to comply with a mandate for investors to be treated similarly for redemption and disclosure purposes even when they are not in identical funds, according to the FT.

“Managers are left having to manage the process to make sure that everybody gets the information they want, but no one gets preferential information,” Jennifer Wood, head of regulation at the Alternative Investment Management Association, told the FT. “People will be feeling their way through that.”

The SEC is also considering a proposal that would tighten requirements for outsourcing functions from custody to tech, lawyers told the FT.

“It’s hard to build a scaleable system when you don’t know what else is coming down the pike,” said Marc Ponchione, a partner at law firm Debevoise & Plimpton. “In combination, these are not plug-and-play rules.”

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