The SEC’s PFA rule, challenged and overturned in court, prompted private fund advisers to enhance data governance and transparency. Despite the rule’s removal, many firms are preparing for future regulations.
In August 2023[1], the Securities and Exchange Commission (SEC) announced new rules and rule amendments to expand the regulation of private fund advisers and update existing rules under the Investment Advisers Act of 1940 that apply to all investment advisers.
The PFA rule was designed to require private funds and their advisers to provide investors with standardized fee and expense information, regular account statements, and additional disclosures regarding conflicts of interest.
Industry groups including the National Association of Private Fund Managers, the Alternative Investment Management Association, the Loan Syndications and Trading Association, the Managed Funds Association and the National Venture Capital Association challenged the rule.
They said that the rule would significantly add to compliance costs while potentially having a negative impact on some GP and LP relationships.
The New Orleans-based Fifth U.S. Circuit Court of Appeals agreed that the SEC had exceeded its authority by adopting the rule, and in June 2024 announced that it would overturn the rule. This removed the requirement for firms to meet deadlines to comply with a range of measures, including issuing quarterly performance and fee reports.
Are private fund firms ready for compliance?
CSC surveyed firms in the first quarter of 2024 to discover their views on the proposed SEC PFA rules, and their readiness for compliance. We surveyed 300 senior professionals from private funds firms split between private equity (35%), private debt (37%) and real estate (28%) to uncover their views on the proposed SEC PFA rules and their readiness for compliance. All respondents managed funds that fall under SEC regulations.
We found that the majority (70%) of respondents had taken positive steps towards compliance, and were mostly or completely prepared, and 77% said the industry was mostly or completely prepared.
While firms were broadly positive on the rules, many had concerns about the impact on the sector, and our recent conversations with senior professionals have highlighted the fact there was some relief that there was no longer a need to meet strict upcoming deadlines.
However, firms also recognize that the work they have undertaken so far to comply with the rules will not have been done in vain. Some of the underlying elements of the rules will need to be implemented at some stage given the general move towards stronger data governance and transparency.
PFA rules bring new challenges for smaller firms
Our research found that smaller firms were less likely to be prepared for the rules. This is partly because larger firms have adopted technologies or outsource to partners with technologies which enable them to establish a centralized single version of the truth, which can be interrogated for different purposes by different systems.
Many smaller firms do not have the capability to easily accommodate the increased reporting and data needs that were required by the PFA rules. While larger firms have been asked for bespoke reporting, increased transparency and tighter timelines for many years, middle market firms don’t have the same resources.
It’s not that the data required for improvements such as quarterly reporting does not exist, but that it has not needed to be communicated, cleaned up or formalized.
The march towards better data governance
Despite the perception that the rules would create more regulatory work, almost three quarters (72%) of respondents agreed that they were necessary to bring much needed transparency to the private funds sector and would help drive the industry to greater asset growth and investor flows.
The positive sentiment towards the rules helps explain why such a high proportion of firms achieved an advanced level of preparedness when there was always a chance that the rules could be overturned.
The march towards better data governance will continue within private funds firms. Those that act now will be in the best possible position to not only achieve the transparency for which the rules originally aimed, but also with any further regulation that comes down the pipe.
Strong data governance means firms are working with the same data, whether it’s the investment team, the operations team, the SEC, an auditor or tax advisor who is looking for information.
The bottom line is that all the data should be in one, secure place structured in a way that makes the information relevant, pertinent, and accessible to each of those people who need it.
Above all, good control of data is key to healthy operations and good investment decisions, and boosts investor confidence through enriched, timely reporting.
How CSC can help
Fund managers with access to up-to-date, structured, insightful, and concise reports will ultimately improve decision making and support more productive conversations with allocators.
By working with a best-in-breed outsourcing partner such as CSC, investment firms can stay up to date with all regulatory and compliance requirements as well as industry best practice in terms of data quality and governance.
CSC has the expense management technology needed to calculate and record expense allocations and payments at the fund level; the accounting technology and expertise to allocate and track expenses, rebates, waivers, and offsets at the LP level to provide enhanced reporting; and deep experience in preparing quarterly financial reports and working with auditors.
Interested in finding out more? Download and read our SEC PFA rules report.
