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The Securities and Exchange Commission (SEC) introduced important regulatory updates on August 24, 2023, impacting private fund advisors through the introduction of the Private Fund Advisor Rule. This regulatory change consists of several key elements aimed at increasing transparency and protecting investor interests. Among these, the Advisor-Driven Secondary Regulation and the Annual Fund Audit Regulation stand out for their direct impact on fund management practices, with modifications to compliance review documentation requirements.
ACA Global, which provides GRC solutions for financial services, has provided a guide for private funds to comply with SEC rules.
Advisor-led secondaries: a new paradigm The SEC’s new Rule 211(h)(2)-2 restructures the landscape of advisor-directed secondary transactions. The rule is defined as a transaction that provides an investor with the option to sell or convert an interest in a fund, and introduces a duty on the adviser to secure an independent fairness or valuation opinion. This requirement is intended to ensure the fairness and transparency of transactions and strengthen investor confidence. The rule also establishes the need for advisors to disclose material business relationships with commenters to provide a clear understanding of potential conflicts of interest.
Annual Fund Audit: Improving Transparency Under Rule 206(4)-10, the SEC requires SEC-registered private fund advisors to undergo annual audits and liquidation audits of private funds, other than securitized asset funds. This represents a departure from previous practice, aligning audit requirements with those of the Custody Regulations and eliminating the option of unannounced audits. This change emphasizes the SEC’s commitment to financial health and ensures that fund operations are regularly and rigorously reviewed. Additionally, the SEC’s flexibility in the face of contingencies regarding audit deadlines highlights a pragmatic approach to enforcement.
Enhanced compliance review documentation Revised Regulation 206(4)-7 increases the documentation standards for compliance reviews. SEC-registered advisors are now tasked with more rigorously documenting the adequacy and effectiveness of compliance policies and procedures. The amendments are intended to foster a culture of continuous improvement and accountability within the advisory sector and prepare companies for greater scrutiny in SEC examinations.
ACA guidance Compliance deadlines have been extended to 2025, and it’s important for advisors to start preparing if they haven’t already. The complexity of the new regulations suggests a heavy compliance burden and the need for strategic planning and possibly external support. Leveraging compliance consulting, outsourcing services, and regulatory technology can prove invaluable in navigating this complex regulatory environment.
Implementing the Private Fund Advisor Regulation requires a comprehensive approach, from readiness assessment to detailed project planning. ACA’s suite of solutions, including the Private Fund Advisor Rule Readiness Assessment and Quarterly Reporting solutions, are designed to help advisors align their practices with new requirements. ACA’s compliance advisory expertise, combined with innovative technology and managed services, helps businesses adapt to and grow under new regulatory frameworks.
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