The SEC rule changes for private fund reporting and disclosure requirements are expected to mostly impact smaller to middle-market private equity investors. Based on our client conversations, the major changes include the following:
- Requirements for quarterly statements for private equity funds
- Requirements for annual audits for private equity funds that replace the prior audit exemption for pooled investment vehicles
- Requirements for fair opinions or valuation opinions for adviser-led secondaries
- Restrictions on “preferential treatment” for certain investors for all private equity funds
- Preferential redemption terms
- Information about portfolio holdings
- Requires disclosure of all other types of preferential treatment to investors as soon as reasonably practicable
- Legacy status granted for funds that commenced prior to the adoption date if compliance would require amending the governing agreements
Potential Impact and Considerations for Private Equity Firms
These new rules are expected to drive increased finance and compliance costs at the fund-level, causing the following expected considerations for private equity firms:
- Private equity will need to implement new processes to comply with quarterly reporting requirements. frequency and consistent information provided by funds under the new rules is expected to be beneficial given the current reporting disparity driven by fund-level compliance resources.
- For private equity funds that previously relied on the allowed audit exemption, they will need to ensure that that they are audit ready. We recommend that private equity funds run a trial process using an experienced internal audit partner to ensure that they are ready for this new process before issuing their first statements to limited partners.
- Private equity funds that previously had a surprise exam performed under the AICPA attestation standards will need to become audit ready to meet the AICPA auditing standards and prepare financial information in accordance with US GAAP. Meeting requirements for an audit can be challenging for those that have been preparing information on a limited basis without knowledge of US GAAP requirements, including disclosures required under ASC 946 Financial Services – Investment Companies. This need for audit readiness is expected to drive a need for interim audit resources to ensure funds are properly prepared for these processes.
- Practices around preferential treatment for certain investors may need to be disclosed or modified if the treatment was not dictated by the governing agreements and instead was an accepted business practice. This may result in questions from limited partners about the terms and conditions of investment in the fund and why those terms vary between limited partners.
How MorganFranklin Can Help
MorganFranklin’s Private Equity professionals includes former big 4 auditors and former private equity fund-level finance and compliance leaders who collaborate with our clients to deal with the challenges coming out of these rule changes. We can work with your private equity fund to design and execute strategies to address audit readiness needs, redesign quarterly reporting processes and implement new solutions for quarterly reporting.
