For managers of alternative investment funds, keeping pace with ever-evolving SEC requirements remains a top priority. Now, at the start of this new year, those in the industry must stay up to date on potential changes while meticulously maintaining compliance. 

CohnReznick recently gathered industry leaders and advisors for our annual Alternative Investment Fund Summit to discuss current trends, key questions, and recommendations for moving forward in private equity, private credit, hedge funds, and more. 

Our “Navigating SEC Regulation and Compliance” panel brought together CohnReznick Partner Joshua Blumenthal, Kleinberg, Kaplan, Wolf & Cohen Partner Richard Guidice, Partner, Seward & Kissel Partner Noelle Indelicato, and Salus GRC President Chris Lombardy to discuss compliance and regulatory requirements for investment advisors. The panel focused on SEC-related priorities for the coming year, discussing the importance of due diligence, insider trading policies, and the need for robust compliance frameworks. The discussion also provided insights into the requirements for compliance and the evolving landscape of fiduciary duties.

Our top takeaways here offer crucial insights into the latest SEC examination findings and current priorities, along with practical tasks for compliance and due diligence.

Compliance needs for ERAs

The importance of comprehensive policies and procedures for ERAs was a recurring theme. The panel emphasized that Exempt Reporting Advisers (ERAs), although not fully subject to the Advisors Act, must adhere to anti-fraud rules and other securities laws. The SEC expects these policies to be implemented and actively followed, not just documented. Panelists highlighted specific requirements – such as pay-to-play policies and record-keeping – as mandatory for ERAs, despite their non-registration status.

• Compliance with marketing regulations: As the SEC scrutinizes websites and social media for endorsements and hypothetical performance claims, advisors must confirm all marketing materials comply with disclosure requirements. 
• ERAs must also have policies and procedures in place to prevent insider trading and manage material non-public information (MNPI).
• State-specific regulations: Emerging managers in particular need to be aware of these requirements (which can vary significantly) and confirm they are met. The panel noted that there is no "one-size-fits-all" solution for compliance, as each firm has unique needs based on its structure and operations.

SEC examination priorities

The panel discussed the SEC's 2025 examination priorities, including the focus on marketing practices, disclosure of conflicts of interest, and valuation of hard-to-value assets. The importance of being proactive in compliance was emphasized, with firms encouraged to stay ahead of regulatory changes and align their practices with SEC expectations.

• Marketing and advertising: The panelists noted that the SEC has been conducting sweeps and enforcement actions related to marketing practices, with particular attention to the new marketing rule. The SEC is particularly concerned with how advisors handle and disclose conflicts of interest and valuation of hard-to-value assets.
• New challenges in supervising remote employees: The SEC is increasingly scrutinizing how firms manage and supervise remote work arrangements in our post-COVID-19 world. Advisors must verify that all offices, including remote locations, are properly listed and supervised according to regulatory requirements.
• The panel discussed the implications of the vacated private funds rule Opens a new windowOpens a new windowOpens a new windowOpens a new windowand its impact on enforcement. While the rule's enforcement may be limited, the underlying principles remain relevant. Panelists highlighted issues such as cross transactions and principal transactions in private equity as areas of focus, with the SEC examining how these transactions are handled and valued.
• The SEC examines management company books to check proper allocation of expenses and to identify any related party transactions. This includes verifying that advisory income offsets management fees and that all transactions are disclosed to investors. The panel emphasized the importance of transparency and compliance with fund documents, particularly regarding fees and expenses charged to the fund.

Policies and procedures

The SEC is increasingly scrutinizing whether firms are following their own policies and procedures. The panelists shared experiences where clients had policies that were not being followed, leading to regulatory issues. These examples emphasize that is not enough to have policies in place; firms must actively adhere to them. Regular training and internal audits are essential to compliance.

• Vendor due diligence: Firms must have comprehensive policies for selecting and monitoring third-party service providers. The panel discussed how the SEC is focusing on the way firms manage their relationships with vendors, including the steps taken to select vendors and confirm they meet regulatory standards. The SEC expects firms to have detailed records of their due diligence processes and to reassess vendors regularly.
  • Regular recertification and reassessment of vendors is especially crucial for cybersecurity providers handling sensitive information. 
• The use of side pockets in hedge funds: When side pockets are used to separate illiquid investments, firms must maintain detailed policies on their use and document the rationale for their use.
• Annual reviews of policies and procedures: Firms must conduct internal audits to identify and address any deficiencies. The panel stressed the importance of testing compliance measures and updating documents periodically to confirm they remain materially accurate. This includes reviewing compliance manuals, codes of ethics, and vendor diligence processes.
• Frequency and depth of compliance reviews: An annual review may suffice for newer managers, while managers of larger funds should conduct ongoing checks, potentially quarterly or biannually, to avoid being overwhelmed. Continuous training for team members, especially new hires, is essential to stay ahead of compliance requirements.

Fair treatment and transparency

• Fiduciary duty: Advisors have a duty of care and loyalty to their clients, ensuring that clients' interests are always prioritized. The panel highlighted the need for fair and balanced implementation of policies and procedures. This includes offering investment opportunities equitably and disclosing any potential conflicts of interest. 
• Expense allocation requires clear policies, especially when managing multiple clients or funds. This includes co-investment vehicles and Special Purpose Vehicles (SPVs), where fair treatment of all investors is paramount.
• Disclosure of complexities of related party transactions (including board seats and shareholder suits) and their impact on the fund is essential. Regulators are increasingly scrutinizing these transactions to see if they are conducted on an arm's-length basis and disclosed appropriately to investors.
• Disclosing enforcement referrals to investors: It is crucial to balance transparency with the potential impact on the fund's reputation. Form ADV disclosures are critical, and firms must verify they are accurate and timely. The decision to disclose during a capital-raising period depends on the specifics of the enforcement action and its potential impact.

Increasing SEC scrutiny and the need for awareness

In discussing current and future areas the SEC is focusing on; panelists noted the SEC has become increasingly meticulous in its examinations. 

• Recent enforcing actions for failures to file Form D and Form 13F underscore the importance of adhering to filing requirements. 
• Insider trading remains a sensitive subject, and firms must keep robust policies to prevent insider trading and manage Material Non-Public Information (MNPI). The SEC has extended its reach to address MNPI cases, including those involving data rooms, value-added investors, and board seats. Firms must also test and monitor communications to verify compliance with record-keeping requirements.
• The SEC has taken recent enforcement actions against firms that fail to comply with record-keeping requirements for off-channel communications, such as private chats and texts. Firms should implement approved communication channels, such as WhatsApp Business, that are backed up and monitored for compliance. 
• Focus on whistleblower protections: The SEC often inquiries about recent departures during exams, seeking potential whistleblower tips. Firms must review and update their old employment agreements to confirm they do not impair whistleblower rights. This includes sending notices and updates to employees and investors. Firms should work with legal counsel on separation agreements to avoid contracting out whistleblower rights. 
• While the practice of outsourcing compliance functions has become more accepted, especially for startup managers with limited resources, the decision should reflect the complexity and size of the business. While outsourcing can provide valuable expertise, firms must be cautious about outsourcing the Chief Compliance Officer (CCO) role, as this can raise red flags with the SEC. Ultimately, responsibility for compliance remains with the manager.

Looking ahead for fund managers

Throughout the panel, these industry leaders emphasized how the regulatory environment for investment advisors is becoming increasingly stringent. Firms must prioritize compliance, verify fair treatment of clients, and maintain robust policies and procedures. Regular due diligence, transparent disclosure, and proactive management of third-party relationships are essential to meet regulatory expectations and safeguard client interests. Overall, the importance of annual compliance reviews and testing cannot be overstated, as these practices help firms stay ahead of regulatory changes and demonstrate their commitment to compliance and their duty to clients.