Regulatory oversight and compliance frameworks for secondary market transactions
Compliance management for secondaries funds encompasses the standard regulatory requirements applicable to private fund managers while addressing unique considerations arising from secondary market transactions. The purchase and sale of existing fund interests involves transfer restrictions, consent processes, and information sharing arrangements that create distinct compliance challenges. Building effective compliance infrastructure supports both regulatory adherence and smooth transaction execution.
Secondaries fund managers typically register with the Securities and Exchange Commission as investment advisers under the Investment Advisers Act of 1940, assuming they meet applicable thresholds. Registration brings compliance obligations including Form ADV filings, books and records requirements, custody rules, and the fiduciary duty standard. These baseline requirements apply regardless of investment strategy.
The secondaries market itself operates within existing securities laws rather than under a dedicated regulatory regime. Fund interests generally constitute securities, making their transfer subject to applicable securities law restrictions. Compliance teams must understand how these restrictions affect transaction structuring and documentation.
Evaluating potential acquisitions requires access to confidential information about underlying funds and their portfolio companies. Compliance policies must address how this information is obtained, used, and protected. Non-disclosure agreements with selling LPs and underlying fund managers establish confidentiality obligations that require ongoing monitoring.
Material nonpublic information presents particular considerations. When acquiring interests in funds that hold publicly traded securities or when underlying portfolio companies are preparing for public offerings, compliance procedures help prevent inadvertent trading on material nonpublic information. Restricted lists and information barriers may be necessary depending on the firm's activities.
Most private fund partnership agreements contain transfer restrictions requiring GP consent for LP interest transfers. These provisions vary significantly across funds, creating compliance complexity when evaluating transactions. Common restrictions include:
Compliance teams track these varying requirements across potential acquisitions, ensuring transaction structuring respects applicable restrictions.
When acquiring fund interests that include ERISA plan assets or when ERISA plans invest in the secondaries fund itself, compliance with ERISA fiduciary requirements and prohibited transaction rules applies. The plan asset regulations determine when underlying fund investments are treated as holding plan assets, which can trigger significant compliance obligations.
Many secondaries funds structure themselves to remain below the 25% threshold that would cause the fund itself to hold plan assets, though this requires ongoing monitoring as the investor base evolves.
While investment advisers are not currently subject to comprehensive AML requirements under the Bank Secrecy Act, many secondaries managers voluntarily implement AML programs. These programs typically include customer identification procedures, ongoing monitoring, and suspicious activity reporting protocols. When acquiring interests from selling LPs, know-your-counterparty procedures help verify the legitimacy of transaction participants.
Compliance oversight extends to marketing materials and investor communications. The SEC's marketing rule governs how registered advisers present performance and make claims about their services. Secondaries-specific considerations include how to present returns on acquired positions versus organic portfolio building, and appropriate disclosure of assumptions in cash flow projections.
Communications with selling LPs during transaction negotiations must avoid misrepresentation while also protecting proprietary deal processes and pricing methodologies.
Secondary market transactions frequently cross jurisdictions, as underlying funds may be domiciled in various countries and selling LPs may be located globally. Compliance frameworks must address applicable foreign regulations, including:
Effective compliance requires policies tailored to the secondaries strategy, not simply generic private fund templates. Key documentation typically includes: