The SEC’s regulatory stance toward private markets has shifted significantly this year. A rollback of proposed rules, a renewed focus on intentional misconduct in enforcement, and efforts to expand retail access to alternative investments all signal a broader recalibration to reduce regulatory burdens and promote capital formation.
Fiduciary Duty
Although the number of enforcement actions under the current SEC leadership is lower than in recent years, one area of continuity for private funds is the focus on fiduciary duty, particularly regarding transparency in fee and expense allocation.
Fiduciary duty may also come under pressure during periods of market volatility and macroeconomic uncertainty—conditions many managers continue to face. In a challenging capital-raising environment, with investors impatient for liquidity, advisers may find themselves weighing whether a suboptimal liquidation or an affiliated transaction serves clients’ best interests or not.
As previously discussed in our article on continuation funds, asset transfers between funds managed by the same adviser, intended to provide investor liquidity, can raise concerns about preferential treatment and potential breaches of fiduciary duty. These risks may also lead to legal exposure, as seen in a recent case where a private equity firm was sued for allegedly providing inadequate information to an investor prior to a consented transaction.
In volatile markets, determining fair values for investor reporting, performance metrics, and sometimes fee calculations become more complex. Even well-intentioned deviations from standard valuation methodologies can lead to inconsistencies with policies and disclosures.
FinCEN AML Rule Updates
In a separate development, FinCEN announced a delay to the implementation of its rule that would bring investment advisers under the federal AML regulatory framework (the FinCEN AML Rule). The new compliance date is January 1, 2028, but FinCEN has indicated plans to revisit the rule’s scope through a future rulemaking process.
While the postponement allows many firms to pause implementation efforts, advisers with exposure to non-U.S. investments remain at risk. Rapidly evolving sanction programs, foreign corruption, and a government focus on transnational criminal organizations can pose significant challenges. These firms should continue to develop AML policies and procedures that align with their level of risk, as well as foreign regulatory expectations, to protect both client assets and the adviser’s reputation.
Key Compliance Considerations
With these risks in mind, we recommend private markets professionals review the following to ensure their compliance programs can meet these challenges as we enter the second half of 2025.
Market Volatility Measures
- Review fund governing documents and/or Form ADV Part 2A for provisions related to volatility, affiliated transactions, and valuation flexibility.
- Involve the compliance team in all affiliated transaction processes.
- Provide training to relevant teams on conflicts of interest, preferential treatment, and affiliated transactions.
- Identify the complete impact that fair values have with the firm’s compliance responsibilities. Fair values normally influence investor reporting and advertised performance, but they can also influence fee calculations, expense allocations, and private funds’ ability to seek and maintain financing.
- Periodically test valuation support materials and evaluate current practices against policies, disclosures, and historical valuations to identify inconsistencies and potential enhancements.
- Establish or review a valuation committee or governance structure to mitigate conflicts and ensure policy adherence.
Fees and Expenses
- Review fee and expense policies, procedures, and disclosures for adequacy and alignment with current practices.
- Ensure disclosures clearly describe fees charged to, and expenses allocated to, portfolio companies, as these are ultimately fund and client assets.
- Conduct periodic, risk-based testing of fee calculations and expense allocations, including fee offsets and side-letter commitments.
- Include expense allocation and travel policies in compliance training.
- Maintain adequate documentation to support the reasonableness of fees charged by advisers or affiliates to funds or portfolio companies for consulting or other services.
AML Investment Diligence
- Assess money laundering and sanctions risk in the context of the firm’s investment strategy.
- Review investment due diligence processes to ensure they incorporate AML, sanctions, and transaction monitoring elements, and they are consistent with the firm’s risk profile.
- Assign clear responsibility for the diligence process and ensure any functions delegated to third-party service providers are subject to documented oversight.
- Integrate these diligence elements formally into the firm’s AML program.
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