Fees, Expenses, Performance and Changes to the Investment Advisers Act

Late last summer, the U.S. Securities and Exchange Commission (SEC) adopted new rules under the U.S. Investment Advisers Act of 1940. The rules will be implemented in phases, with the first deadlines for compliance coming up in September 2024, and the remaining rules coming into effect in March 2025. These new rules are intended to enhance the regulation of fund advisors by requiring private fund advisors to provide investors with quarterly statements detailing information about private fund performance, fees and expenses; obtain an annual audit for each private fund; and obtain a fairness opinion or valuation opinion in connection with an advisor-led secondary transaction.

The newly required quarterly report should be viewed as a separate standalone document. Timing of the quarterly report will be a challenge, as it needs to be delivered 45 days for quarter end and at a 90-day cadence for fiscal year end. For fund of funds, the requirement will be 75 days for quarter end and 120 days for fiscal year end.

In creating these quarterly reports, private fund advisors may run into challenges with fees and expenses-a crucial component of the rule changes. Instances where the fund is paying compensation will need to be disclosed. In situations where a fund is bearing legal, audit or similar fees, they will need to cross reference governing documents to ensure accurate reporting. Advisors may need to change governing documents to make them more descriptive of what expenses are allowable or not allowable. In addition to expenses at the fund level being tracked, compensation from the fund's investment must also be tracked which adds in another layer of complexity.

Another crucial component of the rule changes is performance. Liquid funds are required to show 10 years of net annual performance or since the funds inception (whichever is shorter); a one-, five- and 10-year annualized net returns; and a year-to-date net return. For illiquid funds, advisors must show internal rates of return and multiples of invested capital since inception and to present a statement of contributions and distributions. It's important to consider how to integrate performance, a strategy as to how performance will be portrayed and how to capture and report all inputs used to calculate the IRR.

SS&C offers a suite of software and services solutions to help you stay compliant with these rule changes.