After the Ruling: How GPs Can Leverage the Vacated SEC PFA Rule’s Transparency for Strategic Advantage

Authored by: Merryn Rosewall, Principal, Risk & Quality Control
Updated on: July 25, 2024

The U.S. Court of Appeals for the Fifth Circuit has vacated the SEC Private Fund Advisor Rule, effectively rendering it null and void. Nevertheless, private equity firms and their general partners should anticipate receiving requests for more granular expense and performance information from investors.

Implications of the US Court Ruling

Vacating the Rule removes the mandatory requirement for private fund advisers to comply with the Quarterly Statement Rule, Restricted Activities Rule, and Preferential Treatment Rule, amongst others. With the Rule no longer applicable, general partners are relieved from the stringent reporting requirements and administrative burden they imposed.

Addressing the Need for Transparency

Investors generally supported the SEC’s desire for increased transparency, improved governance, and the need to address conflicts of interest disclosure and management. Consequently, despite the Rule being vacated, the industry-wide push for greater transparency and accountability will persist. By way of example, the updated Reporting Template and new Performance and Cash Flows Template being developed through the Institutional Limited Partner Association’s (“ILPA”) Quarterly Reporting Standards Initiative (“QRSI”) will incorporate many of the requirements of the Quarterly Statement Rule for illiquid funds, including detailed fee, compensation and expense disclosures, and performance calculations on a gross, net, levered and unlevered basis.  General partners adhering to ILPA reporting standards will be expected to adopt these templates. Furthermore, they should anticipate investor requests for more granular information.

Voluntary Compliance and Best Practices

While the legal mandate is no longer in place, general partners should benefit from voluntarily adopting some of the practices and disclosures outlined therein. This can enhance trust and transparency with LPs, potentially giving firms a competitive edge. 

As Igor Rozenblit, Partner at Iron Road Partners, noted in March 2024, "Half of our clients now are saying that whether or not this gets overturned in the courts, they would comply with components of it…because they themselves need to apply a little bit more transparency."

Engaging with Industry Organizations and Standardizing Reporting

Neal Prunier, Senior Director of Industry Affairs at ILPA, emphasized the importance of transparency, governance, and alignment of interest, which remain crucial for fostering trust with investors.

Collaborating with institutions such as ILPA can help private equity firms stay aligned with industry expectations and standards, and facilitate the provision of standardized templates to their investors.

Furnishing detailed quarterly statements can showcase a dedication to transparency, setting firms apart in a competitive market.

Leveraging Technology and Outsourcing

Gen II has been actively engaged in the QRSI, assisting ILPA in the development of the Revised Reporting Template and new Performance and Cash Flows Template. Gen II will support our clients in producing these templates upon their finalization from ILPA.

Robust data management and reporting tools, like Gen II’s Sensr® product suite, can help clients maintain high standards of transparency and accountability. This fully integrated web-based solution allows private capital firms to access comprehensive fund data and analytics, ensuring that general partners can efficiently meet internal and external reporting requirements.

Outsourcing administrative and compliance tasks to Gen II can help manage the reporting workload. This allows internal teams to focus on core business activities while ensuring that reporting standards are met.

For questions or more information, contact your Gen II Client Service Manager or email secrules@gen2fund.com.

Published on: July 25, 2024