Private Fund Adviser Rule Reporting Requirements

Regulatory Compliance
May 23, 2024

On September 14, 2023, the Securities and Exchange Commission (“SEC”) published the Private Fund Adviser Rule (“PFAR”). A majority of the rules will be effective either 12 or 18 months from the date of publication. A summary of the effective dates can be found in this helpful Institutional Limited Partner Association (“ILPA”) document. However, various industry groups have challenged the PFAR in court. The outcome of that litigation will have a major impact on the timing of implementation efforts by investment advisers subject to the rule, leading many advisers to adopt a “wait and see” approach to implementation. While the parties have requested a ruling by the end of May, there is no guarantee that will happen, so investment managers should begin preparations soon to ensure compliance.

As promulgated, the most significant impacts of the PFAR from a reporting standpoint are as follows, which would become requirements for covered advisers in mid-March 2025:

  1. Fee and Expense Disclosure:
    Within 45 days of quarter-end and 90 days after fiscal year-end, financial reporting must include detailed fund-level accounting of:
    • Compensation, fees and other amounts paid to the adviser by the fund;
    • Fees and expenses allocated or paid by the fund must be broken out into separate line items related to the following: organization, accounting, legal, administration, audit, tax, due diligence, and travel; and
    • The amount of any offsets or rebates, including a detailed breakout of all compensation allocated or paid to the adviser by a portfolio company
  1. Performance Disclosure:
    Within 45 days of quarter-end and 90 days after fiscal year-end, financial reporting must include detailed fund-level accounting of performance, including reflecting the impact on performance (i.e., by including and excluding) of fund-level credit facilities (as applicable):
    • Gross IRR and MOIC;
    • Net IRR and MOIC;
    • Gross IRR and MOIC for the realized and unrealized portions of the portfolio; and
    • Statement of contributions and distributions.

  1. Audit Requirement:
    Financial statements must be audited by an independent public accountant, be prepared in accordance with U.S. GAAP (or reconciled to U.S. GAAP) and distributed to investors within 120 days after fiscal year end. Under the PFAR as promulgated, advisers will no longer be able to opt-out of the audit requirement using a surprise exam.

  1. Additional Requirements:
    In addition to the reporting requirements outlined above, there are other rules related to adviser- led secondaries, restricted activities, and preferential treatment, among other items, outlined in the attached supplemental ILPA summary as well.

What Petra Is Doing

Since the initial announcement of the PFAR, Petra Funds Group has been focused on how the new rules will affect investment advisers, both from a compliance and reporting perspective. Petra continues to have ongoing conversations with various law firms and accounting firms, as well as with ILPA, where one of our Senior Directors sits on the steering committee for ILPA’s adoption of the PFAR. ILPA provides industry-leading reporting standards across the private equity industry, so its views and output will have a major impact on the private equity community. Notably, regardless of the outcome of the current litigation, ILPA may recommend adoption of some portion of the PFAR in its reporting package, and limited partners may demand such additional detail and transparency in any event. Advisers should, therefore, not assume that as the litigation goes, so go any additional requirements from the limited partner community.

What Advisers Should Consider Doing

Pending the litigation outcome, it is our view that investment advisers should plan to implement the PFAR fee and expense and performance requirements in their reporting for Q3 2024, so they are ready for the Q4 2024 reporting rollout. Having a quarter before effectiveness for a “test run” is prudent and allows the adviser to optimize its processes and output. In addition, if advisers are relying on the surprise exam to satisfy the Custody Rule requirements for any of their funds, they should begin discussions with an audit firm now, to ensure that they will not be racing to onboard an auditor at the last minute.

Leading up to the finalization of the PFAR, we would also suggest advisers begin to prepare for the updated reporting requirements by ensuring the following:

How Petra Can Help

Petra Funds Group’s compliance team has decades of experience managing SEC regulatory compliance programs for private fund advisers. The group’s expertise enables them to provide insight and guidance on a wide range of regulatory compliance services, from investment adviser registration to ongoing compliance support to performing SEC mock examinations. Learn more about Petra’s comprehensive compliance offering here and contact Paul Winters and Andrew Kesler with questions.

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