Since the implementation of the Dodd-Frank Act in 2010, private fund managers have seen the steady evolution of regulation governing their products. Alongside the recently proposed AML/CFT regulations, recent developments in SEC private fund rules are aligning compliance standards for private funds more closely with those governing registered investment companies (RICs).

But this regulatory harmonization doesn’t have to be negative for fund managers. By being proactive in adapting compliance frameworks, addressing operational challenges and leveraging synergies across regulatory expectations, advisory firms can uphold the highest standards of integrity, transparency, and client service.

Following the Madoff scandal, private fund managers found themselves subject to oversight by the SEC as either registered investment advisers or exempt reporting advisers. Since then, the regulatory burden has continued to increase with the introduction and expansion of Form PF and the private fund rules.

AML regulations and SEC private fund rules

Last month, the FinCEN proposed to expand anti-money-laundering (AML) rules to SEC registered investment advisers. In the release, the US Department of Treasury highlighted the risks associated with certain private fund investors as a key rationale for the rules expansion. RICs, through their transfer agents, have traditionally been subject to AML standards. This step introduces yet another regulator to the oversight of private funds, resulting in increased cost and less flexibility for private fund managers.

The SEC’s private fund rules signify a broader trend towards uniformity within the financial sector. As private fund managers adapt to these evolving regulatory landscapes, they are tasked with aligning compliance practices with established standards for RICs.

The rules aim to enhance transparency, mitigate risks, and foster investor confidence across diverse investment vehicles, while also introducing new complexities and challenges for advisory firms. But they will also reduce the many benefits of private funds such as reduced costs, flexibility and broader investment opportunities.

Integration of rules into existing compliance programs

As private fund managers integrate AML regulations and SEC private fund rules into their existing compliance programs, they will need comprehensive infrastructure, technology, and expertise to support compliance efforts effectively. Moreover, advisory firms must prioritize staff training, stakeholder engagement, and organizational restructuring to navigate regulatory convergence while minimizing disruptions to advisory services.

Compliance teams should conduct a thorough assessment of existing compliance frameworks, identifying areas for enhancement, and development. Collaboration with industry peers, regulatory bodies, and compliance experts can provide valuable insights and best practices for navigating the complexities of unified compliance effectively.

Opportunity to leverage synergy across regulatory standards

While regulatory convergence presents challenges, it also offers opportunities for RIAs/ERAs to leverage synergies across regulatory standards. The mutual fund industry has established standards which can provide a useful guide to private fund managers on how to efficiently implement corresponding elements of the private fund and AML rules. In other words, private fund managers don’t need to reinvent the wheel, just modify it.

As private fund managers navigate the broadening reach of regulators, they must embrace the opportunities and challenges inherent in regulatory convergence. By proactively adapting compliance frameworks, addressing operational complexities, and leveraging synergies across regulatory standards, advisory firms can uphold the highest standards of integrity, transparency, and client service.

As the regulatory landscape continues to evolve, private fund managers play a pivotal role in shaping the future of compliance within the financial industry, ensuring resilience, trust, and stability in the face of regulatory change.

Tyler Mathis is a consultant. He advises investment advisers and broker-dealers on daily operational matters in order to comply with US regulatory requirements.