Fund Compliance & SEC Regulatory Counsel

Fund Compliance & SEC Regulatory Counsel

For investment advisers, private fund managers, and other SEC-registered entities, compliance is not a project — it is an operating discipline that must scale with assets, products, and personnel. The Division of Examinations conducts thousands of adviser examinations every year, the Division of Enforcement brings dozens of actions against fund managers annually, and the Marketing Rule, custody framework, Form PF revisions, and private fund adviser reforms have made the regulatory perimeter both broader and more technical. John Montague, Esq. serves as outside regulatory counsel to hedge fund managers, private equity sponsors, venture capital firms, family offices, and registered investment advisers, helping CCOs and general counsel design defensible compliance programs, navigate SEC examinations, respond to enforcement inquiries, and remediate violations before they escalate.

The Compliance Rule and the Annual Review

Rule 206(4)-7 of the Investment Advisers Act — the Compliance Rule — is deceptively short but operationally demanding. It requires every registered adviser to (1) adopt and implement written policies and procedures reasonably designed to prevent violations of the Act and rules thereunder, (2) designate a Chief Compliance Officer responsible for administering those policies, and (3) review the adequacy and effectiveness of the program at least annually. The annual review is not a checkbox: SEC staff routinely test whether the review actually identified weaknesses, whether issues were remediated, and whether the CCO had the authority and resources to drive change. A thin or rote annual review is an invitation for a deficiency letter. We help clients design risk-based reviews that map identified risks to tested controls, document the methodology, and produce a remediation calendar the CCO can defend in an exit interview.

Marketing Rule Implementation and Maintenance

The amended Rule 206(4)-1 (effective November 4, 2022) consolidated the former advertising and cash solicitation rules and introduced principles-based prohibitions, structured requirements for testimonials and endorsements, and detailed performance presentation standards. Common compliance pitfalls include net-of-fees presentation inconsistencies, missing or inadequate disclosures on hypothetical and extracted performance, undisclosed material conflicts in endorsement arrangements, recordkeeping gaps for promoter compensation, and outdated marketing review workflows. We audit existing marketing libraries, design pre-publication review checklists, draft compliant template disclosures for performance and case studies, and train marketing teams on the difference between permissible educational content and inadvertent advertising.

Custody, Form PF, and the Private Fund Adviser Framework

The Custody Rule (Rule 206(4)-2) reaches further than most managers expect. Standing letters of authorization, bill-pay services, and even certain reporting arrangements can create deemed custody, triggering the surprise examination requirement, the qualified custodian requirement, and the audit-or-account-statement obligation for pooled vehicles. Form PF reporting thresholds expanded materially with the 2023 and 2024 amendments, requiring large hedge fund advisers, private equity fund advisers, and liquidity fund advisers to report on shorter cycles and disclose new categories of stress, leverage, and concentration data. The SEC’s private fund adviser rules — portions of which were vacated by the Fifth Circuit in 2024 but whose underlying compliance posture still informs examiner expectations — demand disciplined disclosure of side letters, preferential redemption rights, fee allocation methodologies, and adviser-led secondaries. We help fund sponsors translate these obligations into operating procedures their fund administrators, auditors, and investor relations teams can actually execute.

Common Compliance Risk Areas

Several themes dominate recent SEC examination priorities and enforcement actions: valuation — particularly for illiquid Level 3 assets, where managers must document independent inputs, challenge sessions, and disclosure to LPs; fee and expense allocation — where the line between fund expenses and management company expenses is policed aggressively, and where broken-deal expenses, regulatory compliance costs, and travel allocations have been the subject of multiple sweep exams; insider trading and MNPI controls — with heightened focus on alternative data, expert networks, and channel checks; cybersecurity and identity theft — under Regulation S-P, Regulation S-ID, and the SEC’s evolving cybersecurity framework; off-channel communications — where text messaging, WhatsApp, and other unmonitored channels have produced hundreds of millions in penalties across registrants; and conflicts of interest — the perennial enforcement theme, encompassing principal trades, cross trades, affiliated service providers, and co-investment allocation methodologies.

Preparing for and Surviving an SEC Examination

SEC examinations are no longer rare for any registered adviser. The Division of Examinations publishes its priorities each year, but the practical question for a firm is whether its existing books and records, policies, and supervisory documentation can survive close review. We conduct mock examinations that mirror the actual document request list, interview key personnel, identify gaps before staff does, and prepare a remediation playbook. When an exam is announced, we manage the document production, coordinate witness preparation for management interviews, negotiate the scope of follow-on requests, and shape the exit interview narrative. If the exam produces a deficiency letter, we draft the response with an eye toward both fixing the issue and avoiding referral to Enforcement.

Enforcement Defense and Voluntary Remediation

When the Enforcement Division opens an inquiry — whether through a Wells call, a formal investigation, or a referral from Examinations — the early choices materially affect the outcome. We help fund managers respond to subpoenas, prepare witnesses for on-the-record testimony, evaluate self-reporting and cooperation credit, structure remediation that the staff will recognize, and negotiate settlements that preserve registration and reputation where possible. Voluntary remediation — whether reimbursing investors for misallocated expenses, restating performance to correct presentation errors, or upgrading supervisory infrastructure — is most credible when documented contemporaneously by counsel rather than reconstructed after the fact.

Frequently Asked Questions

Can my CCO be part-time or shared with another firm? The SEC has not required a full-time CCO, but it has emphasized that the CCO must have sufficient authority, knowledge, and resources to administer the compliance program. Part-time or fractional CCO arrangements work for smaller advisers; they fail when the CCO lacks access to senior management or cannot dedicate adequate time during peak periods like Form ADV amendments, Form PF deadlines, or examinations.

How often should we conduct mock examinations? For most registered advisers, every 18 to 24 months strikes the right balance. Firms approaching novel products, rapid AUM growth, regulatory transitions (such as crossing the large hedge fund adviser threshold), or recent personnel turnover should consider more frequent reviews.

What records do I really need to keep? Rule 204-2 enumerates the categories, but the practical answer is broader: any communication with clients or prospective clients, all marketing materials and their supporting performance calculations, trading and allocation records, valuation memoranda, expense allocation worksheets, side letters, vendor due diligence files, and the documentation supporting your annual compliance review. Five years from creation is the floor; longer for partnership and entity records.

What should I do if I discover a violation? Stop the conduct, preserve documents, engage counsel before drawing conclusions, evaluate whether investor harm requires remediation, and consider self-reporting after privileged analysis. Self-reporting is not always the right answer — but it is the right question to ask early.