In a significant move, the Securities and Exchange Commission (SEC) adopted new rules on August 23, 2023, under the Investment Advisers Act of 1940 (Advisers Act) to strengthen the regulation of private fund advisers. These new rules are designed to increase the transparency and accountability of private funds while protecting investors.
These new rules will have a substantial impact on how private funds manage and allocate expenses. In this blog, we will explore the SEC’s new rules for private funds and how an automated expense allocation solution can help private funds ensure compliance and fairness.
New SEC Rules
There are three ways the new SEC rules will affect expense management, allocation, and accounting practices in private funds:
- Quarterly Statement Rule
Registered private fund advisers must now provide quarterly statements to private fund investors. The statement must have information on the performance of the fund, the costs of investing in the fund, the fees the fund charges, and certain compensation that advisers receive.
- Private Fund Annual Audit Rule
Registered private fund advisers are required to ensure that the funds they manage undergo a financial statement audit that complies with the requirements described in the Investment Advisers Act of 1940, Section 206(4)-2, also known as the Advisers Act custody rule. These audits will provide an important check on the value of private fund assets and protect private fund investors from misappropriation.
- Restricted Activities Rule
All registered private fund advisers will no longer be able to allocate or charge certain fees and expenses to the funds. This includes expense allocation restrictions related to the following:
- Investigations of the adviser without investor disclosure and consent from fund investors
- Adviser regulatory, examinations, or compliance fees or expenses, unless such fees and expenses are disclosed to investors
- Non-pro rata expense allocation methods unless the adviser provides advance written notice of the non-pro rata charge and describes how the allocation approach is fair and equitable
Taking the Next Step
These new rules including the Private Fund Audit Rule and Quarterly Statement Rule compliance dates will be 18 months after publication in the Federal Register. A compliance date for the Restricted Activities Rule is 12 months after the publication date in the Federal Register for advisers with more than $1.5 billion in private funds assets managed; and 18 months after the publication date in the Federal Register for advisers with less than $1.5 billion in private funds assets managed. After publication in the Federal Register, the amended Advisers Act compliance rule must be followed within 60 days.
Be future-ready with IVP Expense Allocation Solution
The IVP Expense Allocation Solution can help private fund advisers comply with these new SEC rules and maintain operational integrity. Here are three ways the solution can do this:
- Fair and Transparent Expense Allocation and Tracking
The IVP Expense Allocation Solution automates the process of categorizing, tracking, and allocating expenses across the fund, making it easier for funds to generate detailed quarterly statements. By automating the expense allocation process, the solution eliminates the need for manual data entry, which reduces the risk of errors and ensures that financial information is always up to date.
- Detailed Audits
The IVP Expense Allocation Solution establishes detailed records of activities and transactions related to expense allocation, including all records of invoice approvals and specific dates of allocations. This simplifies the annual audit process, making compliance and tracking much easier.
- Workflow-Based Approach
The IVP Expense Allocation Solution increases control over the allocation process. The solution creates pre-defined templates and rules for expense allocation that outlines the criteria for expense distribution. Moreover, the solution clearly defines workflows that each type of invoice should follow for review and approval. This ensures the fund’s governance and compliance standards are followed consistently.
With these capabilities, the IVP Expense Allocation Solution can be an invaluable tool for private fund advisers trying to navigate the new SEC regulations. Private funds can use the IVP solution to strengthen governance and oversight practices, promote financial accountability, compliance, and transparency, and foster a robust governance framework.
Expense Allocation Solution
This expense allocation solution helps asset managers improve accuracy and efficiency, reduce the risk of errors, and guarantee compliance. It ensures that in-house teams can process most allocations swiftly, allowing them to focus more on exception handling. Accounts payable and expense allocations are also tracked by the platform through customizable reports. Additionally, it offers easy-to-set-up invoice approvals and maintains a detailed audit trail for approvals, rejections, and changes.
Latest blogs delivered right to your inbox
Resources For Growing Your Firm
IVP’s FinanceForward Thinking
Discover the latest trends, find out how your peers are accelerating their digital transformations, get updates on evolving products, and more.