Despite the Fifth U.S. Circuit Court of Appeals’ ruling against SEC’s Private Fund Adviser (PFA) rule, most firms are prepared, with ILPA’s reporting templates facilitating compliance and transparency improvements.
When the New Orleans-based Fifth U.S. Circuit Court of Appeals agreed that the Securities and Exchange Commission (SEC) had exceeded its authority with the new Private Fund Adviser (PFA) rule, many private fund firms welcomed the fact that they would no longer need to meet forthcoming deadlines for compliance.
However, according to research undertaken by CSC in the first quarter of 2024, the majority (70%) of firms said that they were already completely or mostly prepared for the proposed rules, and 77% said that the industry was completely or mostly prepared.
CSC surveyed 300 senior professionals from private funds firms split between private equity (35%), private debt (37%) and real estate (28%) to discover their views on the proposed SEC PFA rules and their readiness for compliance. All respondents managed funds that fall under SEC regulations.
The way forward with ILPA templates
Of the five elements[1] proposed as part of the rule, the Quarterly Statement was seen as the easiest to implement by both large and smaller firms.
One of the drivers behind their positive view is likely to be the cooperation between the Institutional Limited Partners Association (ILPA), fund managers, and service providers (including CSC) to develop templates that will help achieve greater transparency in quarterly reporting.
ILPA’s CEO Jennifer Choi commented[2] on the Court’s decision to vacate the PFA rules that this work would carry on. She said, “ILPA’s mission as an industry advocate, convener, and standard-setter has never been more important. Our work will continue, in particular, our commitment to delivering the next evolution of quarterly reporting standards through our Quarterly Reporting Standards Initiative.”
ILPA has now launched that next stage, which aims “to create evolved quarterly reporting standards that can be adopted across the industry, driving greater convergence, and improving the experience for all participants.”
ILPA invited industry participants to provide comment on its Draft ILPA Reporting Template (Post-PFA Version) and Draft ILPA Performance Template (Post-PFA Version), which enabled firms and service providers to directly influence the next generation of templates.
What are the opportunities for smaller firms to build trust with investors?
CSC’s research found that smaller firms were more likely to say they were unprepared than larger firms, which generally have resources or can outsource reporting to partners with technologies enabling them to establish a centralized data model.
However, smaller firms were generally more positive about the new rules than larger firms. Almost three-quarters (70%) of smaller firms versus 60% of overall respondents thought the private funds industry would accelerate growth, because the proposed new rules would improve trust with investors.
Only 8% of smaller firms thought the private funds industry would shrink due to their regulatory burden, versus 17% overall.
While smaller firms surveyed by CSC saw the Quarterly Statement rule as the easiest to adopt, they also saw it as requiring the least investment, likely due in part to the availability of ILPA templates.
Additionally, the private funds industry is on a trajectory towards regulatory maturation, and the focus on reporting and transparency could present an opportunity for smaller firms to build trust with investors and grow over the long term.
We anticipate that while there may be an upfront investment in training, processes, and technology, within a year or so the production of quarterly statements will be incorporated into “business as usual,” especially as ILPA templates are widely adopted and recognized as the industry standard.
Best practice in data management
Whatever the size of firm, the rules were forcing a broader adoption of best practices for data management and reporting. Even without the rule, the journey to put the right people, systems and processes in place will continue, regardless of SEC requirements.
In our view, each firm should now determine what they consider to be industry best practices in data governance and reporting, addressing current and future investors’ most frequent questions and requests for information and paving the way for future regulation.
How CSC can help
By working with a best-in-class outsourcing partner such as CSC, investment firms can stay fully up-to-date with all regulatory and compliance requirements as well as industry best practice in terms of data quality and governance.
CSC continues to be closely involved with ILPA as part of its Steering Group and Performance Workstream, and has in-depth knowledge of the new templates and how they can best be implemented.
CSC also 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 our new SEC PFA rules report.
[1] https://www.sec.gov/files/2023-oasb-private-fund-adviser-rules-chart.pdf
[2] https://ilpa.org/news/statement-from-ilpa-ceo-jennifer-choi-on-ruling-on-u-s-secs-private-fund-advisers-rules/
