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Regulatory and Compliance Issues: The Three Key Elements of Smooth RIA Compliance

June 2014

The following was distributed as part of the Real Estate Private Equity Fund - First Quarter, 2014 newsletter.

On the regulatory and compliance front, this year is a historic one for private equity funds. With the Dodd-Frank rules now fully in effect, virtually all funds with a roster of institutional clients and $150 million or more in assets under management have registered with the U.S. Securities and Exchange Commission (SEC) as Registered Investment Advisers—and now need to comply with the significant reporting requirements of the Commission’s Division of Investment Management including disclosures, record keeping, compliance procedures, custody requirements, and other key matters.

For all but the largest firms, meeting these requirements has been a sizable challenge. In practice, our observation has been that this challenge can be broken down into three distinct elements. First, fund managers have needed to develop a comprehensive, long-term strategy. Most funds have wisely relied either on attorneys or consultants to help them determine what needs to be done and by whom. But even if subject-matter experts are providing the guidance, the funds managers, as the clients, set the tone and direction. “Funds that try to do the minimum possible are setting themselves up for trouble, while those who over-allocate resources may find their approach unsustainable; right-sizing the compliance strategy is the key to success,” said Ronald A. Kaplan, Northeast Leader of the CohnReznick’s Commercial Real Estate Practice. In other words, funds need to embrace their new compliance environment while remembering that they still have a business to run.

The second key element is identifying a Chief Compliance Officer. The Chief Financial Officer and Chief Accounting Officer are likely candidates. Because that person will set the tone for the entire effort, they should be chosen with an eye toward more than just functional expertise. The best CCOs will be not just “implementers in chief” but ambassadors for compliance, able to build buy-in and marshal support behind a vision. Further, it is important to recognize that the CCO role is not a position in name only—it carries real responsibilities. As a result, it is unrealistic to expect that person to continue to shoulder all of their previous responsibilities. “The firms that have had the smoothest compliance experiences are those that have created an extra controller or similar position to help take on some of the CCO’s ‘other’ job responsibilities,” noted Kaplan.

Third, funds must ensure that the needed resources in time, money, and people are dedicated at the appropriate points in the organization and in the deal flow. This requirement extends beyond the fund; because each individual deal now requires external auditing, operating partners will be expected to provide financials at a level that will be new to most of them. Compliance is a team sport; funds need to ensure that the process is thoroughly managed so that requirements are met in an orderly, ongoing fashion.

Fund managers that find themselves bristling under these new obligations can take solace in the fact that the first year is the toughest. Those that focus on these key transition points are likely to find that they have established a compliance foundation that will serve them well going forward.


For more information, please contact Ron Kaplan, Partner, at 646-834-4179.

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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