Compliance for Private Equity Funds: Regulatory Framework and Oversight Requirements

Private equity fund managers operate within an intricate regulatory framework that has expanded substantially since the 2010 Dodd-Frank Act eliminated the private adviser exemption and required most PE advisers to register with the Securities and Exchange Commission. This shift transformed the compliance landscape for an industry that previously operated with minimal federal oversight, introducing comprehensive disclosure obligations, detailed reporting requirements, and regular examination by SEC staff.

The regulatory environment facing private equity fund managers encompasses multiple layers of requirements. The Investment Advisers Act of 1940 establishes the foundational framework, requiring registered advisers to adopt compliance programs, maintain extensive books and records, provide disclosure through Form ADV, and submit to SEC examination authority. Beyond these baseline obligations, PE managers must navigate custody rules addressing the safeguarding of client assets, marketing regulations governing communications with prospective investors, political contribution restrictions designed to prevent pay-to-play arrangements, and ERISA considerations when pension plans invest in PE funds.

Effective compliance in private equity requires understanding these requirements, implementing robust policies and procedures tailored to PE-specific business models, and fostering a culture where regulatory obligations are integrated into investment and operational processes. This article examines the essential compliance considerations for private equity fund managers, from SEC registration through annual compliance reviews and chief compliance officer responsibilities, providing practical guidance for building and maintaining effective compliance programs.

SEC Registration Under the Investment Advisers Act

The Investment Advisers Act of 1940 governs the registration and regulation of investment advisers, including private equity fund managers. The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, eliminated the private adviser exemption that most PE advisers previously relied upon, requiring advisers with $150 million or more in assets under management to register with the SEC.

Investment advisers managing private equity funds generally must register with the SEC once their regulatory assets under management reach the $150 million threshold. Regulatory AUM for private fund advisers is calculated based on the gross asset value of the private funds advised, without deduction for leverage, liabilities, or fund expenses. This means that a PE fund with $100 million in equity capital and $50 million in fund-level debt would contribute $150 million to the adviser's regulatory AUM calculation.

The registration process begins with filing Form ADV through the Investment Adviser Registration Depository (IARD), an electronic filing system operated by FINRA. Initial registration requires submission of Form ADV Parts 1 and 2, payment of applicable fees, and satisfaction of state notice filing requirements in states where the adviser maintains a place of business or has more than five clients. The SEC typically processes registrations within 45 days, though the timeline can extend if questions arise or additional information is requested.

Registered investment advisers must update Form ADV at least annually through an annual updating amendment filed within 90 days of the adviser's fiscal year end. More frequent updates through other-than-annual amendments are required whenever information in Form ADV becomes materially inaccurate. For example, if a key employee changes roles, the adviser experiences a regulatory action, or the firm opens new offices, an other-than-annual amendment must be filed promptly to reflect the change.

Exemptions from SEC Registration

Certain investment advisers remain exempt from SEC registration despite managing private equity funds. The venture capital fund adviser exemption, added by Dodd-Frank, exempts advisers that advise solely venture capital funds, regardless of assets under management. To qualify, funds must meet the definition of a venture capital fund under Rule 203(l)-1, which requires that the fund holds no more than 20 percent of its capital in non-qualifying investments, does not incur leverage beyond limited amounts for short periods, and does not offer redemption rights to investors.

While many early-stage venture funds clearly qualify for this exemption, the line between venture capital and growth equity or small buyout funds can blur. Funds making control investments in established companies, using significant leverage, or holding substantial public securities or other non-qualifying investments typically cannot rely on the VC fund adviser exemption. PE managers should carefully analyze whether their funds meet the regulatory definition before claiming the exemption.

The private fund adviser exemption under Section 203(m) of the Advisers Act exempts advisers with less than $150 million in private fund assets under management in the United States from SEC registration. These advisers may still be required to register with state securities regulators, depending on the requirements of states where they maintain offices or clients. State registration requirements vary significantly, with some states imposing custody rules, financial requirements, and examination programs that differ from federal standards.

Form ADV: Disclosure Obligations and Best Practices

Form ADV serves dual purposes as both the investment adviser registration application and the primary disclosure document provided to advisory clients. The form consists of two main parts, with Part 1 collecting regulatory information about the adviser's business and Part 2 providing narrative disclosure to clients about services, fees, conflicts of interest, and other material information.

Form ADV Part 1: Regulatory Reporting

Part 1 of Form ADV requests detailed information across multiple items and schedules covering the adviser's business, ownership, services, employees, and regulatory history. Items 1 through 4 collect basic identifying information including legal names, business addresses, SEC file number, and predecessor firm information. Items 5 through 7 address the adviser's business operations, requesting information about client types, assets under management, types of advisory services offered, and participation in client transactions.

For private equity fund managers, Item 5 captures information about client categories and assets under management. Most PE advisers report substantial assets in the "pooled investment vehicles" category, with smaller amounts potentially reported for separately managed accounts or other client types. The regulatory assets under management reported in Item 5 determine whether the adviser meets minimum thresholds for SEC registration and Form PF filing obligations.

Item 7 addresses the adviser's participation or interest in client transactions, with subsections particularly relevant to PE managers. Item 7.A requests information about whether the adviser or related persons recommend securities to clients in which the adviser or related persons have material financial interests. Private equity managers often make investments alongside their funds through co-investment vehicles or general partner commitments, creating the need for affirmative responses and appropriate disclosure.

Section 7.B of Form ADV applies specifically to private fund advisers, requiring detailed reporting about each private fund advised. For each fund, advisers must provide basic identification information, fund type classification, regulatory assets under management, gross asset value, strategy information, and beneficial ownership details. Private equity funds are typically classified as "private equity funds" rather than "hedge funds" or "other private funds," though fund-of-funds structures or secondary funds may require careful classification analysis.

Schedule A requires disclosure of direct and indirect owners of the investment adviser, typically including individuals with 25 percent or more ownership interests and any entities in the adviser's ownership chain. Schedule B requests information about all advisory clients, though advisers may omit this schedule if they have no separately managed account clients. Schedule D collects detailed information referenced in Items 7, 10, and 11, including information about private funds advised, separately managed accounts, and disciplinary history.

Form ADV Part 2: The Firm Brochure

Form ADV Part 2 serves as the adviser's disclosure document, written in narrative format and delivered to clients and prospective clients. The brochure must be written in plain English, avoiding legal and compliance jargon in favor of clear, straightforward descriptions of the adviser's business practices and conflicts of interest.

Item 4 of Part 2 describes the adviser's business, including information about the firm's history, principal owners, types of advisory services offered, assets under management, and whether the adviser has the ability or authority to make investment decisions on clients' behalf. Private equity fund managers should clearly describe their focus on private equity investments, typical investment strategies employed (such as buyouts, growth equity, or sector-specific approaches), and the control-oriented nature of PE investments.

Item 5 addresses fees and compensation, requiring detailed disclosure of fee structures including management fees, performance-based fees, and any other compensation received. Private equity funds typically charge management fees calculated as a percentage of committed capital during the investment period and invested capital or net asset value thereafter, with the transition point and calculation methodology varying by fund. The brochure should clearly explain these fee calculations, including how capital is measured, when fees are charged, and how the basis for fee calculation changes over the fund's lifecycle.

Performance fees in private equity typically take the form of carried interest, where the general partner receives a percentage (commonly 20 percent) of fund profits after returning capital and preferred returns to limited partners. Item 5 should describe the carried interest structure, including the preferred return threshold (often 8 percent), whether the waterfall is American-style (calculated at the fund level) or European-style (calculated on individual investments), and any clawback provisions that may require the general partner to return carried interest distributions in certain circumstances.

Items 6 through 8 address performance-based fees, types of clients advised, and methods of analysis used in managing investments. Item 8 requires description of the adviser's investment strategies and methods of analysis, providing an opportunity to explain the PE fund's approach to sourcing investments, conducting due diligence, structuring transactions, working with portfolio companies post-acquisition, and ultimately realizing investments through sales or other exit events.

Items 10 through 12 cover conflicts of interest, particularly those arising from other financial industry activities, participation in client transactions, and brokerage practices. Private equity managers typically face numerous conflicts that require disclosure, including allocation of investment opportunities among funds, co-investment arrangements, portfolio company transactions with adviser-affiliated entities, and use of affiliated service providers. Comprehensive disclosure of these conflicts in Form ADV Part 2 is essential, as the disclosure itself serves as the primary method of addressing many conflicts under the Advisers Act.

Form PF: Private Fund Reporting Requirements

Form PF requires registered investment advisers to report confidential information about the private funds they manage for use by the Financial Stability Oversight Council in monitoring systemic risk. The form was adopted pursuant to Section 404 of the Dodd-Frank Act, which required the SEC and Commodity Futures Trading Commission to collect information from private fund advisers necessary for assessment of systemic risk.

Form PF filing obligations vary based on the adviser's regulatory assets under management and the types of private funds advised. All private fund advisers with $150 million or more in regulatory assets under management must file Form PF, though the specific sections completed and filing frequency depend on the adviser's total private fund assets and allocation across fund types.

Section 1: Reporting for All Filers

Section 1 of Form PF applies to all advisers required to file the form, collecting basic information about the adviser and each private fund managed. Question 1 requests identifying information about the adviser. Question 2 asks for the adviser's total private fund assets under management broken down by fund type, with private equity advisers typically reporting assets in the "private equity fund" category.

Questions 3 through 15 collect fund-level information about each private fund advised. Question 6 addresses strategy classification, with private equity funds typically classified using one or more of the PE-specific strategy codes such as "buyout," "growth capital," "venture capital," or "secondary." Question 7 requests information about parallel funds and master-feeder structures, while Question 8 addresses beneficial ownership concentration.

Questions 9 through 15 collect financial information including gross and net asset values, investor flows during the reporting period, portfolio investments, borrowing information, and derivatives exposures. For private equity funds with limited derivatives use, many of these questions require minimal information, though funds using subscription lines or other fund-level borrowing must report that information in Question 14.

Section 4: Large Private Equity Fund Advisers

Section 4 of Form PF applies to large private equity fund advisers, defined as advisers with at least $2 billion in private equity fund assets under management. This section collects substantially more detailed information than Section 1, requesting aggregate data across all PE funds advised as well as information about individual large funds.

Question 52 collects aggregate information about all private equity funds advised by qualifying large PE advisers, including total commitments, total capital called, total portfolio company debt, and geographic and sector concentration. Question 53 addresses investment performance, requesting information about internal rates of return for all PE funds managed, broken down by vintage year and investment strategy. Question 54 requests information about portfolio company characteristics including revenue, earnings, leverage multiples, and industry classifications.

Questions 55 through 61 collect detailed information about each qualifying private equity fund, defined as PE funds with at least $2 billion in gross assets. This fund-level reporting includes detailed portfolio company information, concentration data, leverage statistics, fund terms, and investment activity. Question 58 addresses portfolio company debt, requesting information about outstanding debt balances, debt multiples, and interest coverage ratios for portfolio companies.

Form PF filing frequency for large private equity fund advisers is annual, with filings due within 120 days after the adviser's fiscal year end. This timeline aligns with typical annual audit deadlines, allowing advisers to coordinate data gathering for both the audit and Form PF filing. Smaller advisers filing only Section 1 also file annually within 120 days after fiscal year end, while hedge fund advisers face quarterly filing requirements.

Custody Rule Compliance

Rule 206(4)-2 under the Investment Advisers Act, commonly known as the custody rule, addresses the safeguarding of client assets and imposes specific requirements on advisers that have custody or possession of client funds or securities. The rule aims to protect clients from misappropriation of their assets by requiring qualified custodians, surprise examinations, and audited financial statements in certain circumstances.

An investment adviser has custody under the rule if the adviser holds client funds or securities directly or if the adviser has the authority to obtain possession of them. For private equity fund managers, custody status typically arises not from physical possession of assets but from the adviser's authority to withdraw or transfer fund assets, authorize portfolio company transactions on behalf of the fund, or serve as general partner or managing member of a fund structured as a limited partnership or limited liability company.

The custody rule establishes different requirements depending on whether the adviser has custody of pooled investment vehicle assets or separately managed account assets. For private equity funds, which are pooled investment vehicles, the primary custody rule requirement is the annual audit provision. Advisers with custody of pooled vehicle assets must, within 120 days of the fund's fiscal year end, distribute audited financial statements prepared by an independent public accountant that is registered with and subject to inspection by the Public Company Accounting Oversight Board (PCAOB).

This audit requirement aligns with the provisions of most private equity fund limited partnership agreements, which typically require annual audited financial statements to be delivered to limited partners within 120 days of year end. The custody rule essentially federalizes this contractual obligation, making delivery of audited financial statements a regulatory requirement and establishing specific standards for the audit.

The audited financial statements must be prepared in accordance with generally accepted accounting principles and must include the auditor's opinion. PE fund managers should engage audit firms with expertise in private fund audits and knowledge of the specialized accounting considerations relevant to private equity structures. The audit should examine the fund's capital account structure, portfolio investment valuations, carried interest calculations, and compliance with the fund's stated valuation policies.

When an adviser includes in Form ADV Part 1 the surprise examination provision for pooled vehicles with audited financial statements, the adviser need not undergo the surprise examination that would otherwise apply to advisers with custody. However, the adviser must check this box in good faith, intending to comply with the audit delivery requirement. Failure to deliver audited financial statements within the 120-day requirement constitutes a custody rule violation subject to examination findings and potential enforcement action.

Qualified custodian requirements also apply to private equity funds. Fund assets must be maintained with a qualified custodian, defined to include banks, registered broker-dealers, registered futures commission merchants, and certain foreign financial institutions. For private equity funds holding interests in portfolio companies, the qualified custodian typically holds securities representing ownership in portfolio entities, with those securities registered in the fund's name or the custodian's name as nominee.

Private equity fund structures can create qualified custodian complications. When a fund directly owns operating company equity, the equity interests themselves must be held by a qualified custodian unless those interests are uncertificated and registered in the fund's name on the books of the portfolio company. When portfolio company ownership is structured through holding companies or intermediate entities, careful analysis is required to ensure custody rule compliance throughout the ownership chain.

Marketing Rule and Advertising Restrictions

The Marketing Rule, adopted by the SEC in December 2020 and effective in November 2021, substantially revised the regulatory framework governing investment adviser marketing and advertising. The rule replaced the previous advertising rule's categorical prohibitions with a principles-based approach focused on preventing materially misleading advertisements while providing advisers greater flexibility in their marketing practices.

The Marketing Rule defines advertisement broadly to include any direct or indirect communication an investment adviser makes to more than one person that offers the adviser's investment advisory services or promotes the adviser's advice regarding securities. This expansive definition encompasses traditional advertisements such as print and broadcast media, as well as digital marketing including adviser websites, social media posts, email campaigns to prospective investors, presentations at industry conferences, and pitch books provided to multiple prospective limited partners.

The core prohibition under the Marketing Rule makes it unlawful for any investment adviser to disseminate any advertisement that includes any untrue statement of material fact or that is otherwise false or misleading. Whether an advertisement is misleading depends on the overall context in which the statement is made, requiring evaluation of the advertisement as a whole, the intended audience's level of financial sophistication, and whether the advertisement includes appropriate disclosures that address potentially misleading implications.

General Prohibitions

The Marketing Rule establishes specific prohibitions applicable to all advertisements. These include prohibitions on including testimonials or endorsements without required disclosures, presenting performance results without meeting specified standards, making material statements of fact the adviser does not have a reasonable basis to believe it will be able to substantiate, referencing specific investment advice without providing disclosure of certain limitations, and including hypothetical performance unless specified conditions are satisfied.

For private equity fund managers, the testimonial and endorsement provisions create new compliance considerations. Testimonials from limited partners, service providers, or other third parties may be used in marketing materials only if accompanied by disclosures regarding any compensation provided for the testimonial, any material conflicts of interest on the part of the person giving the testimonial, and a statement that the testimonial may not be representative of the experiences of other clients. The adviser must also have a reasonable basis for believing that the testimonial is not false or misleading.

The performance provisions establish detailed requirements for presenting track records, fund returns, and investment results in marketing materials. Advertisements containing performance results must include both gross and net performance, with net performance reflecting the deduction of advisory fees and all other fees and expenses charged to the fund. The gross and net returns must be presented with equal prominence, preventing advisers from featuring gross returns prominently while minimizing net return disclosure.

Performance Advertising Standards

Private equity performance advertising raises unique considerations given the long-duration nature of PE funds and the multiple ways performance can be calculated and presented. The Marketing Rule requires that performance advertisements include all portfolios that fall within the particular category of the presented performance with substantially similar investment policies, objectives, and strategies, subject to limited exceptions. This "all or none" standard prevents cherry-picking of only the best-performing funds when presenting track records.

For example, if a PE manager presents the performance of its buyout funds in marketing materials, the advertisement must include all buyout funds the manager has advised with substantially similar strategies, not just the top-performing vintage years. The manager cannot exclude funds that underperformed unless an exclusion would be immaterial or the manager has adopted criteria for excluding funds that are applied consistently and objectively.

Time period selection in performance advertising must avoid cherry-picking favorable measurement periods. Performance should generally be calculated through the most recent practicable date before the advertisement's first use, and advisers should avoid selecting measurement periods that artificially inflate returns by excluding periods of poor performance or capturing only strong performance cycles. If specific time periods are highlighted, the advertisement should provide context through longer-term performance or other relevant metrics.

Internal rate of return and multiple of invested capital represent the most common performance metrics for private equity funds. When presenting IRR, advisers should clearly disclose the calculation methodology, including whether the IRR is gross or net of fees, how capital calls and distributions are dated for purposes of the calculation, and the measurement date. MOIC presentations should similarly indicate whether the multiple is calculated on a gross or net basis and how unrealized investments are valued for purposes of the calculation.

Predecessor performance presents particular challenges under the Marketing Rule. When a private equity team leaves one firm to establish a new management company, the team may wish to present the performance results achieved at the prior firm as part of the new firm's track record. The Marketing Rule permits predecessor performance advertising only if the advertisement clearly and prominently identifies and explains the predecessor nature of the performance and all accounts with substantially similar investment policies, objectives, and strategies at the prior firm are included in the performance presentation.

Books and Records for Marketing Materials

The Marketing Rule imposes extensive books and records requirements for advertisements. Advisers must maintain copies of all advertisements disseminated, along with records of the dates of first and last use. For advertisements containing performance results, the adviser must maintain the underlying data supporting the performance calculations and all other information supporting statements of fact made in the advertisement. These records must be maintained for five years after the last date of use, with the first two years in an easily accessible place.

For private equity fund managers, this creates significant compliance burdens. Each iteration of a pitch book, each version of the firm's website, each conference presentation, and each marketing email must be retained with appropriate documentation. When performance is presented, the supporting calculations, valuation data, and fund financial statements must be preserved. Many PE managers implement document management systems with version control and audit trails to satisfy these recordkeeping obligations.

Political Contribution Rules and Pay-to-Play Restrictions

Rule 206(4)-5 under the Investment Advisers Act, commonly known as the pay-to-play rule, restricts political contributions by investment advisers and their covered associates to prevent quid pro quo arrangements where advisers make political contributions with the expectation of receiving advisory business from government entities. The rule is particularly important for private equity managers seeking investments from public pension plans, which constitute a significant source of institutional capital for PE funds.

The pay-to-play rule prohibits an investment adviser from providing advisory services for compensation to a government entity within two years after the adviser or any covered associate makes a contribution to certain officials of that government entity. This two-year time-out applies to contributions to officials who can influence the selection of investment advisers by the government entity, including elected officials with authority over the government entity and officials with direct responsibility for selecting advisers.

Covered associates include the adviser's general partners, managing members, executive officers, and other individuals with a similar status or function; employees who solicit government entities for the adviser; and supervised persons with authority to recommend or determine which government entities should be solicited. This broad definition captures senior investment professionals, fundraising personnel, and other key employees whose political contributions could potentially influence government investment decisions.

De minimis exemptions provide limited relief for small contributions. Covered associates who are entitled to vote for the official receiving the contribution may make contributions of up to $350 per election without triggering the two-year time-out. Contributions of up to $150 per election are permitted even if the covered associate cannot vote for the official. These de minimis amounts remain small enough that they are unlikely to influence official actions while permitting basic political participation.

Private equity firms typically implement comprehensive compliance programs to prevent political contribution violations. These programs include pre-clearance requirements for all political contributions by covered associates, prohibitions on contributions exceeding de minimis amounts to relevant officials, tracking systems to monitor contributions and identify potential violations, and training programs to ensure covered associates understand the restrictions and their obligations.

Violations of the pay-to-play rule create significant consequences. Beyond SEC enforcement risk, many limited partnership agreements include representations and warranties that the adviser has not violated the rule, and violations could constitute grounds for termination or fee recoupment. Public pension plans often require detailed questionnaires about political contributions as part of their due diligence processes, and violations can disqualify managers from consideration for investments.

The pay-to-play rule also restricts third-party placement agents and solicitors. Investment advisers are prohibited from providing compensation to third parties for soliciting government entities unless the third party is a registered investment adviser or registered broker-dealer subject to pay-to-play restrictions. This provision aims to prevent advisers from circumventing the rule by using unregulated intermediaries to make contributions or provide benefits to government officials on their behalf.

ERISA Considerations for Private Equity Funds

The Employee Retirement Income Security Act of 1974 imposes fiduciary obligations, prohibited transaction restrictions, and reporting requirements on retirement plans and those who manage plan assets. When pension funds, 401(k) plans, individual retirement accounts, or other employee benefit plans invest in private equity funds, ERISA's requirements potentially apply to both the investing plans and the PE fund managers, creating compliance obligations and liability exposure that must be carefully managed.

The central ERISA question for private equity funds is whether the fund's assets constitute plan assets of investing benefit plans. When a fund's assets are deemed to include plan assets, the fund manager becomes an ERISA fiduciary subject to ERISA's duty of loyalty and duty of prudence, prohibited transaction rules under Section 406 apply to fund activities, and additional reporting and disclosure obligations may arise.

Plan Assets Determination

The Department of Labor's plan assets regulation under ERISA Section 3(42) establishes the framework for determining when a fund's assets include plan assets. Under the regulation, when a benefit plan acquires an equity interest in an entity, the plan's assets include both the equity interest and an undivided interest in each underlying asset of the entity, unless an exception applies. This look-through treatment would make portfolio company investments plan assets subject to ERISA restrictions.

The venture capital operating company exception provides the most commonly used plan asset exemption for private equity funds. An entity qualifies as a VCOC if at least 50 percent of its assets (valued at cost) are invested in venture capital investments or operating companies in which the entity has management rights. Management rights mean contractual rights directly or indirectly to substantially participate in or influence the conduct of the management of the portfolio company.

Most traditional private equity funds that take control positions in portfolio companies, appoint board members, and actively participate in portfolio company management can qualify as VCOCs. The control-oriented nature of PE investing naturally provides the management rights necessary for VCOC qualification. However, funds must monitor the 50 percent threshold continuously, as falling below it causes loss of VCOC status and immediate plan asset treatment of fund assets.

The 25 percent limitation provides an alternative method for avoiding plan asset status. Under the plan assets regulation, an entity's assets do not include plan assets if less than 25 percent of the value of each class of equity interests is held by benefit plan investors. The 25 percent calculation excludes equity held by the general partner and other persons with discretionary authority or control over the fund's assets, meaning that only limited partner interests are counted toward the threshold.

Many private equity funds that qualify as VCOCs also implement 25 percent limitations as a belt-and-suspenders approach or to provide protection if VCOC status is inadvertently lost. Fund offering documents include provisions authorizing the general partner to reject subscriptions from benefit plan investors if accepting the subscription would cause benefit plan investor ownership to exceed 25 percent, to require redemptions if the threshold is breached, or to segregate plan investors into separate parallel funds to maintain compliance.

ERISA Fiduciary Obligations

If a private equity fund's assets include plan assets because the fund cannot qualify for the VCOC exception or 25 percent limitation, the fund manager becomes an ERISA fiduciary subject to the duty of loyalty and duty of prudence. The duty of loyalty requires fiduciaries to discharge their duties solely in the interest of plan participants and beneficiaries, for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan.

The duty of prudence requires fiduciaries to act with the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use in conducting an enterprise of a like character with like aims. This prudence standard requires documented investment processes, thorough due diligence, reasonable fee structures, and diversification of investments to minimize the risk of large losses.

ERISA's prohibited transaction rules under Section 406 prohibit specific categories of transactions between plans and parties in interest, including sales or exchanges of property, loans or extensions of credit, and furnishing of goods or services. For private equity funds subject to plan asset treatment, portfolio company transactions with parties in interest to investing plans could violate these prohibitions unless an exemption applies.

Prohibited Transaction Exemption 2006-16 provides important relief for private equity funds subject to plan asset treatment. The exemption permits certain transactions between operating companies and parties in interest to benefit plan investors, provided specified conditions are satisfied including that the transaction is on terms at least as favorable to the fund as an arm's length transaction with an unrelated party and the fund manager adheres to its documented investment policies and procedures.

Annual Compliance Review and CCO Responsibilities

Rule 206(4)-7 under the Advisers Act requires every registered investment adviser to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder. The rule also requires advisers to designate a chief compliance officer responsible for administering the compliance program and to conduct an annual review of the adequacy and effectiveness of the policies and procedures.

Written Compliance Policies and Procedures

The compliance program must be tailored to the specific business model, services offered, conflicts of interest, and risk profile of the investment adviser. For private equity fund managers, the program should address portfolio management processes, valuation methodologies, allocation of investment opportunities among funds, performance calculations, marketing and advertising, custody, books and records, personal securities transactions, insider trading, conflicts of interest, code of ethics, privacy and data security, business continuity, and supervision of employees.

Investment allocation policies assume particular importance for multi-fund PE managers. When a manager advises multiple private equity funds with overlapping investment mandates, the compliance program must establish clear criteria for allocating opportunities among the funds to ensure fair treatment and avoid favoring one fund over another. Typical allocation approaches consider factors such as available capital, fund vintage, strategy fit, portfolio company stage, and existing portfolio composition.

Valuation policies for private equity funds must describe the methodologies used to value portfolio companies, the frequency of valuations, the approval process for valuation determinations, and the use of third-party valuation specialists if applicable. Given the illiquid nature of private equity investments and the judgment required in valuation, robust policies with appropriate governance help ensure consistency and defensibility of fair value determinations.

Conflicts of interest policies should identify the specific conflicts facing the adviser and establish procedures for addressing each category of conflict. Common conflicts for PE managers include allocation of opportunities among funds, co-investment arrangements where key employees invest alongside funds on favorable terms, transactions between portfolio companies and adviser-affiliated entities, use of affiliated service providers, and general partner clawback obligations that may create incentives to delay distributions or realize investments in particular sequences.

Chief Compliance Officer Role and Qualifications

The chief compliance officer must be competent and knowledgeable regarding the Advisers Act and must be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures. The CCO should have direct access to the adviser's board of directors or equivalent governing body and sufficient resources to carry out compliance responsibilities effectively.

For private equity fund managers, the CCO role requires understanding both traditional investment adviser compliance and PE-specific considerations including fund structuring, limited partnership agreements, capital calls and distributions, carried interest calculations, and investor relations practices. Many PE firms hire CCOs with backgrounds at law firms specializing in investment management, compliance roles at other private fund managers, or examination experience at the SEC.

The CCO's responsibilities include developing and updating the compliance program, implementing compliance training for employees, monitoring adherence to policies and procedures, investigating potential violations, managing the firm's regulatory examination process, coordinating with outside counsel on regulatory matters, and conducting the annual compliance review. The CCO typically reports to the firm's senior management and presents compliance matters to the board or advisory committee regularly.

Annual Compliance Review

The annual review required by Rule 206(4)-7 must assess the adequacy of the compliance policies and procedures and the effectiveness of their implementation. This review should evaluate whether the policies remain reasonably designed to prevent violations given changes in the firm's business, assess whether employees are following established procedures, identify any compliance violations that occurred during the year, and recommend updates or enhancements to strengthen the program.

The annual review methodology typically includes interviewing key personnel to assess their understanding of policies and compliance obligations, testing specific controls through sampling of investment decisions, marketing materials, expense allocations, or other activities, reviewing exception reports and compliance incidents that occurred during the year, analyzing regulatory developments including new rules, examination priorities, and enforcement actions, and evaluating adequacy of resources devoted to the compliance function.

The CCO must prepare a written report of the annual review and present it to the adviser's board of directors or equivalent governing body. The report should summarize the review process, document findings and identified deficiencies, describe remedial actions taken or recommended, and include recommendations for program improvements. Many advisers memorialize the board's consideration of the annual review report in board minutes, documenting the board's oversight of the compliance program.

Examination Preparedness and Regulatory Engagement

Registered investment advisers are subject to examination by the SEC's Division of Examinations, which conducts risk-based examinations to assess compliance with the Advisers Act and other securities laws. Private equity fund managers should expect to be examined periodically and should maintain examination readiness through organized books and records, current compliance policies, and documented compliance processes.

SEC examinations of private equity advisers typically focus on several core areas. Conflicts of interest receive significant attention, with examiners evaluating whether the adviser has adequately disclosed conflicts and implemented controls to address them. Common conflicts examined include allocation of expenses between the adviser and funds, allocation of broken deal expenses, use of portfolio company transaction fees and monitoring fees, acceleration of monitoring fees in connection with portfolio company sales, co-investment allocation practices, and preferential treatment of certain investors through side letters.

Valuation practices represent another frequent examination focus area for PE managers. Examiners review the adviser's valuation policies, assess whether valuations are determined consistently with stated policies, evaluate the independence and expertise of persons making valuation determinations, and compare valuations to subsequent events such as sales or markdowns. Significant discrepancies between quarter-end valuations and near-term sale prices often prompt examiner scrutiny.

Marketing and performance advertising has intensified as an examination priority following adoption of the Marketing Rule. Examiners review pitch books, website content, conference presentations, and other marketing materials for compliance with performance advertising requirements, testimonial disclosures, and prohibitions on false or misleading statements. Advisers should maintain robust documentation supporting performance calculations and retain all versions of marketing materials as required by Rule 204-2.

When the SEC initiates an examination, the adviser receives a document request list seeking extensive records across the areas under examination. Response to this initial request typically requires coordination across multiple functions including compliance, finance, investor relations, and legal. Advisers should organize responsive documents systematically, review materials for accuracy and completeness before production, and maintain privilege logs for any privileged materials withheld.

Following completion of the examination, the SEC staff typically provides a deficiency letter identifying compliance issues discovered during the examination and requesting corrective actions. Advisers should respond comprehensively, describing remedial measures implemented and demonstrating that identified deficiencies have been addressed. In some cases, examinations may result in enforcement referrals for more serious violations, leading to settlement negotiations or enforcement proceedings.

Key Takeaways

• SEC registration creates comprehensive compliance obligations: Private equity fund managers with $150 million or more in regulatory assets under management must register with the SEC, adopt written compliance programs, maintain extensive books and records, file Form ADV and Form PF, and submit to SEC examination authority.
• Form ADV disclosure should be complete and current: Part 1 provides regulatory information about the adviser's business while Part 2 serves as the primary disclosure document to clients. Both must be updated annually and whenever information becomes materially inaccurate, with particular attention to conflicts of interest disclosure in Part 2.
• Form PF reporting requirements vary by fund size: All private fund advisers with $150 million or more in AUM must file Form PF annually, while large PE advisers with $2 billion or more must file annually with more detailed fund-level information. Data collection systems must support aggregation of required information from multiple sources.
• Custody rule compliance centers on annual audits: Private equity fund managers typically satisfy custody rule requirements by distributing audited financial statements prepared by PCAOB-registered auditors within 120 days of fiscal year end, aligning with common LPA requirements and investor expectations.
• Marketing practices must comply with the Marketing Rule: Performance advertising requires presentation of gross and net returns with equal prominence, inclusion of all substantially similar portfolios, appropriate time period selection, and extensive documentation. Testimonials require specific disclosures about compensation and conflicts.
• Political contributions demand careful monitoring: The pay-to-play rule prohibits advisory services to government entities for two years following contributions by the adviser or covered associates to certain officials, with only de minimis contributions permitted. Violations can disqualify managers from public pension plan investments.
• ERISA plan asset status requires proactive management: Most PE funds qualify as VCOCs through control positions with management rights or implement 25 percent limitations on benefit plan investor participation. Failure to avoid plan asset status subjects managers to ERISA fiduciary duties and prohibited transaction restrictions.
• Annual compliance reviews assess program effectiveness: The chief compliance officer must conduct annual reviews evaluating whether policies remain reasonably designed to prevent violations and whether employees follow established procedures. Written reports to the board document findings and recommendations.
• CCO competence and empowerment are essential: The chief compliance officer should have expertise in investment adviser regulation, authority to develop and enforce policies, adequate resources to fulfill responsibilities, and direct access to senior management and the board.
• Examination preparedness requires ongoing attention: Organized books and records, current compliance policies, documented processes, and robust controls position advisers to respond effectively to SEC examinations. Focus areas typically include conflicts of interest, valuation practices, fee calculations, and marketing materials.