Triage for a rule that might not survive: the SEC’s private fund adviser package

The week

On August 23, 2023, the Securities and Exchange Commission adopted a package of rules for advisers to private funds, the investment vehicles behind private equity buyouts, private loans to companies and hedge fund strategies. Pension plans, university endowments, insurers and wealthy families put money into them, and a firm called an adviser, or manager, runs the fund and charges fees for doing so. For years, investors in these funds had complained that fees and expenses were hard to see and harder to compare. The SEC was trying to change that.

Under the package, registered advisers, those signed up with the SEC and subject to its examinations, would have to send investors quarterly statements on fund fees, expenses and performance. They would also need an annual financial statement audit for each private fund, and a fairness or valuation opinion for adviser-led secondary transactions.

That last item needs explaining. In an adviser-led secondary, the manager arranges for some of a fund’s holdings to be sold, often to a new vehicle it also manages, giving existing investors a chance to cash out or roll over. Because the adviser can sit on both sides of that deal, investors worry about whether the price is fair. A fairness or valuation opinion is an independent expert’s view of that price.

All advisers to private funds, registered or not, faced restrictions on certain fees and expenses absent disclosure or investor consent. They also faced limits on preferential treatment, including disclosure of side-letter terms granted to some investors. A side letter is a private agreement between the manager and one investor that adds to or changes the fund’s main terms, such as a fee discount or a right to extra information. Big investors negotiate them routinely; smaller investors often never see them.

The restricted activities were spelled out one by one. An adviser could not charge a fund for the costs of an investigation into the adviser without disclosure and investor consent. It could never do so where the investigation ended in a sanction for violating the Advisers Act. The adviser’s own regulatory, examination and compliance costs could be passed to the fund only if disclosed.

Reducing a clawback by the taxes the adviser had paid required disclosure of the amounts before and after tax. A clawback is the adviser’s obligation to hand back profit share it was paid too early, once later losses are counted. Splitting the costs of a portfolio investment other than pro rata required an approach that was fair and equitable, plus advance written notice explaining why. Borrowing from a fund required disclosure and consent.

The preferential treatment rule worked in two layers. It barred preferential redemption rights and preferential information about portfolio holdings where they would have a material negative effect on other investors, unless the same terms were offered to everyone. Every other preferential term had to be disclosed: material economic terms before a prospective investor committed, and all terms after it had invested. Agreements signed before the compliance date received legacy status for the outright prohibitions and the consent requirements, so managers would not have to reopen documents for funds already running.

Two further details completed the picture. The new audit had to meet the standard already set by the audit provision of the custody rule, the Advisers Act rule on safekeeping client assets. The secondaries rule also required the adviser to summarize any material business relationship it had, or had had in the previous two years, with the opinion provider. Separately, an amendment to the compliance rule required every registered adviser, including those with no private fund clients at all, to document its annual compliance review in writing.

The package had a long history. The SEC proposed it in February 2022 in a tougher form, and several practices the proposal would have banned outright reached the final rule as permitted with disclosure or consent. The agency pointed to the industry’s growth to justify the effort. By its count, the number of private funds rose from about 32,700 in 2012 to about 100,900 in 2022, and the assets they held from $9.8 trillion to $26.6 trillion.

Publication in the Federal Register on September 14, 2023 set the clocks. The compliance rule amendment applied sixty days later. Advisers with $1.5 billion or more in private fund assets had until September 14, 2024 to comply with the secondaries, preferential treatment and restricted activities rules, and smaller advisers had until March 14, 2025. The quarterly statement and audit rules applied to everyone from March 14, 2025.

Then came the twist. On September 1, 2023, nine days after adoption, six trade associations asked the U.S. Court of Appeals for the Fifth Circuit to review the rules. Four of them were the National Association of Private Fund Managers, the Alternative Investment Management Association, the American Investment Council and the Loan Syndications and Trading Association. The Managed Funds Association and the National Venture Capital Association completed the group, so private equity, hedge funds, loan markets and venture capital were all represented.

The petition argued that the SEC lacked statutory authority, that the final rule strayed too far from the proposal, and that it was arbitrary and capricious. From that point, every affected firm faced the same uncomfortable question: how much should we spend getting ready for a rule that a court might throw out?

Private equity, private credit and hedge fund advisers, and the wealth managers and family offices that run private vehicles, faced an awkward planning problem in the fall of 2023. A large rule had compliance dates 12 to 18 months away and a credible legal challenge pending. Building everything risked waste. Building nothing risked a scramble if the rule survived.

A firm could triage instead, sorting each piece of work by why it would be needed. Three categories cover every obligation in the package: work investors would demand anyway, work existing law already required, and work only the rule required. The approach travels well beyond private funds, because every regulated industry faces rules that are contested, delayed or likely to change. It starts with where the work actually lands inside a fund manager.

How fees and expenses flow inside a fund manager

A private fund is a pool of investors’ money with its own bank accounts, its own books and its own legal documents. The adviser that runs it earns a management fee, typically a percentage of the money committed or invested, and often a share of profits. On top of that, the fund itself pays many costs: legal fees, audit fees, deal expenses, and sometimes fees to companies affiliated with the adviser.

Several parties keep track of these flows. A fund administrator, usually an outside firm, keeps the fund’s official books and calculates investors’ balances. The adviser’s own finance team runs an accounting system that records expenses and decides how to split them. When one expense benefits several funds, such as a legal bill for a deal in which a main fund and a smaller co-investment vehicle both invest, someone must decide what share each pays. That decision is an allocation.

There are also offsets. When an adviser earns certain fees from the companies a fund owns, such as fees for monitoring or advising those companies, fund documents often require part or all of that income to reduce the management fee investors pay. Calculating offsets correctly requires knowing every such fee, which entity received it and which fund’s investors it belongs to.

The arithmetic gets harder as structures multiply. If a fund agreement calls for a full offset and a portfolio company pays the adviser a transaction fee, the whole fee reduces the next management fee. If a co-investment vehicle also owns part of that company, the offset may apply only to the main fund’s share, depending on the documents. Errors run in both directions: too small an offset overcharges investors, and too large a one gives away the adviser’s revenue. Either way, someone has to find the error, explain it and correct it in a later period.

In many firms, this information lives in several places: the administrator’s reports, the accounting system, email approvals and spreadsheets maintained by a handful of people. That fragmentation is the real challenge the SEC’s quarterly statement exposed. Producing a single, accurate number for investors is easy when the data lives in one place and hard when it is scattered.

Who the package reached

The obligations did not fall evenly. The quarterly statement, audit and secondaries rules applied only to advisers registered with the SEC. An adviser that manages only private funds generally has to register once it has $150 million or more in private fund assets in the United States. Large private equity sponsors, multi-strategy hedge fund managers and established private credit firms were all in this group.

Exempt reporting advisers were in a different position. These advisers file limited information with the SEC but do not register; most of them advise only venture capital funds, or only private funds with less than $150 million in U.S. assets. They escaped the statement, audit and secondaries rules, but the restricted activities and preferential treatment rules applied to them. A small venture firm with generous side letters for an anchor investor had real work to do, even with no quarterly statement to produce.

Some organizations were outside the package entirely. Single-family offices that meet the SEC’s family office rule are excluded from the definition of an investment adviser. Advisers to securitized asset funds, such as collateralized loan obligations, were carved out of the five private fund rules. Wealth managers that run feeder funds or funds of funds for clients were usually inside, and faced longer statement deadlines because they depend on the underlying managers’ numbers.

Fund strategy changed the work as well. The rule asked liquid funds, such as most hedge funds, for annual net returns since inception and average returns over one, five and ten years. Illiquid funds, such as buyout and private credit funds, had to show internal rates of return and multiples of invested capital, gross and net. They also had to show the effect of the fund’s subscription line on those figures.

A subscription line is a short-term loan a fund draws instead of calling investors’ capital immediately, which can make early returns look better. A hedge fund manager’s data problem was mostly about fees and expenses. A buyout manager’s also reached into its performance calculations, which usually live in yet another set of spreadsheets.

Work investors would demand anyway

The quarterly statement was the heaviest operational lift. It required, in a prescribed table, fund-level fees and expenses, adviser compensation, offsets, rebates and waivers, and performance calculated differently for liquid and illiquid funds. Most of this was not new to institutional investors. The Institutional Limited Partners Association, a trade body for the investors in private funds, had published a reporting template years earlier, and large pension plans and endowments already asked for fee and expense detail in operational due diligence questionnaires, the long sets of questions investors send before committing money.

The hard part was the data, not the format. In many firms, fee figures came from the fund administrator, expense allocations from the accounting system, and management fee offsets from a spreadsheet maintained by one person in finance. Producing a reconciled quarterly number required a single fee and expense ledger per fund, with each line tied to its source document and its allocation rule. It required a calculation for offsets that someone other than its author could reproduce, and a sign-off by the chief financial officer or fund controller before release.

The ledger works like a household budget for each fund, where every line can be traced back to a receipt and to the rule that decided who pays for it. Once it exists, answering an investor’s question takes minutes rather than weeks.

That ledger had value whatever the Fifth Circuit decided. It shortened investor reporting cycles, answered due diligence questionnaires faster, and reduced the cost of fundraising with large allocators. A firm could fund it from the fundraising budget rather than the compliance budget, which made the litigation risk irrelevant to the investment decision.

Suppose a mid-sized private equity firm is raising its fourth fund. Its largest prospective investor, a state pension plan, sends a questionnaire asking for five years of fee and expense detail by fund. Under the old setup, two people in finance spend three weeks reconciling administrator reports with spreadsheets, and the answers still contain caveats. With a ledger in place, the same request takes two days, and the numbers match what investors have been receiving each quarter. The pension plan’s team notices. That is a fundraising advantage, rule or no rule.

What a ledger line has to carry

The ledger is only as useful as its fields. Each line needs the fund and vehicle charged, the expense type, the vendor and invoice, and a flag for whether the vendor is affiliated with the adviser. It needs the allocation key used, the clause of the fund agreement or policy that authorized it, the approver and the date. Where the item interacts with the management fee, it needs the offset treatment and the share credited back to investors.

Those fields map cleanly onto what an auditor or an examiner asks for. An auditor testing fund expenses selects a sample and asks for the invoice, the authority and the allocation. An examiner reviewing fee calculations asks how offsets were computed and who checked them. A firm whose ledger answers those requests directly spends days on fieldwork that used to take weeks, and stops discovering errors only when someone outside asks.

The fund administrator relationship usually needs attention too. Many administration agreements were written to deliver investor capital account statements, not line-level expense data in a form the adviser can load into its own systems. Renewal is the moment to add delivery of that data on a schedule, in defined formats, with the adviser’s right to keep it if the relationship ends. Administrators’ service organization control reports, the independent attestations of their controls, should cover the expense processes the adviser relies on.

When the business case is weaker

The case for the ledger is strongest for firms that raise money from large institutions on a regular cycle. A firm with a handful of family office investors, a single evergreen vehicle and no plans to raise again may find that investors never ask for line-level fee detail. For that firm, a full ledger is closer to rule-only work. A lighter version, with the offset calculation documented and expenses mapped to their authority, may be enough.

The test is empirical. Count the due diligence questionnaires and side-letter reporting requests received in the last two fundraises that asked for fee and expense detail. If the answer is most of them, the ledger belongs in the first column. If it is almost none, it belongs lower down, and the firm should say so openly rather than build it under a compliance label.

Work existing law already required

Several restrictions in the package codified expectations the SEC had already been enforcing under the antifraud provisions of the Advisers Act, the 1940 law that governs investment advisers. Antifraud provisions prohibit advisers from misleading clients, and because advisers owe a fiduciary duty, a legal obligation to put clients’ interests first, that prohibition reaches a long way. Allocating expenses fairly between a flagship fund and its co-investment vehicles, disclosing fees charged by the adviser’s affiliates, and avoiding undisclosed accelerated monitoring fees had all featured in enforcement actions before 2023. A rule could change the penalty and the burden of proof. It did not create the underlying duty.

The record before 2023 made this concrete. In June 2015 the SEC settled with Kohlberg Kravis Roberts over broken deal expenses, the costs of deals that never closed. The agency found that KKR had allocated more than $17 million of those costs to its flagship funds and none to co-investors who benefited from the same deal sourcing, and KKR paid nearly $30 million.

In October 2015, three Blackstone private equity advisers paid nearly $39 million over undisclosed accelerated monitoring fees and a legal fee arrangement that gave the adviser a much bigger discount than its funds received. Neither case needed the 2023 package. Both rested on the fiduciary duty and on rules already in force, including the 2007 rule that bars advisers to pooled vehicles from misleading their investors or prospective investors.

Both cases also involved missing or inadequate written policies on the practices at issue. That detail explains why allocation policies, and the evidence of applying them, matter as much as the allocations themselves.

What a defensible allocation record contains

An allocation policy earns its keep when it settles hard cases before they arise. The common hard cases are familiar. Broken deal costs arise when co-investors were lined up but the deal failed. Shared expenses span a flagship fund and a continuation vehicle. And the adviser’s own staff or affiliates may charge costs to portfolio companies. A good policy names each case, the default method, who may approve a departure and how that departure is recorded.

The record then needs to show the policy at work. For each material shared expense, it should hold the amount, the vehicles that benefited, the method applied, the resulting split and the approver, written at the time rather than reconstructed later. Reconstruction is where firms get into trouble, because a split that looks reasonable in hindsight may not match what the policy said on the day. Compliance testing can then sample decisions each quarter and compare them with the policy, which produces the record an examiner would expect to see.

Accelerated monitoring fees illustrate the point. Some advisers charged portfolio companies fees for years of future monitoring services, then collected the remaining years all at once when the company was sold, even though no more monitoring would occur. Where investors were not told, the SEC had treated that as misleading under existing law.

The practical work here was evidence. An allocation policy is worth little if nobody can show how a given invoice was split. Firms needed allocation decisions recorded at the time they were made, with the policy clause applied and the approver named. They needed a register of affiliated service providers and every fee each one charged a fund. And they needed a side-letter register, because existing disclosure duties already required advisers to avoid misleading investors about who received better terms.

The side-letter register was the most neglected asset in the industry. Side letters were negotiated by investor relations and legal over many years, stored as documents and tracked informally. Building the register meant extracting each obligation, such as most-favored-nation rights, excuse rights, notice rights and fee discounts, and mapping it to investors and funds.

A few of those terms need defining. A most-favored-nation right lets an investor claim better terms that the manager later gives to other comparable investors. An excuse right lets an investor sit out certain investments, for example ones that conflict with its own policies. A notice right obliges the manager to tell the investor about specified events, such as a key person leaving the firm.

Some firms trialed language models for the first pass of extraction, with lawyers checking every result. A language model is AI software that reads and writes text; used this way, it drafts a summary of each letter, while a lawyer remains responsible for what goes in the register. The output also served daily operations: a compliance team that knows which investors are owed notice of a key-person event can actually give it.

Why this column outlasts any one commission

A fair objection is that enforcement priorities change with leadership, so the second column is less safe than it looks. Three things cut against that. First, the limitations period is long. Congress amended the securities laws at the start of 2021. Since then, the SEC can seek disgorgement for up to ten years for violations that require proof of scienter, a culpable state of mind, and five years for others. A misallocation booked in 2023 stays reachable well after the commissioners who wrote the rule have left.

Second, investors enforce the same duties through contract. Fund agreements, side letters and the prospect of not investing in the next fund give large limited partners real bargaining power, and many write audit and information rights into their terms. Third, auditors test expense allocation and fee calculations as part of the annual fund audit, whatever the regulator’s agenda. A firm that cannot show its reasoning has a problem with its auditor before it has one with the SEC.

Work only the rule required

A smaller set of obligations existed only because of the rule. The prescribed statement layout, the mandatory audit for funds not already audited, the fairness or valuation opinion for adviser-led secondaries, and the specific advance notice for certain preferential terms fell into this category. If the rule fell, this work had no independent value, apart from good practice that some firms would adopt voluntarily.

Here the sensible approach was to prepare without committing. A firm could identify which funds lacked audits and obtain quotes, without signing engagement letters. It could select candidate opinion providers and document their relationships with the adviser, without paying retainers. It could draft statement templates and map the ledger’s fields to them, without building the production process. Counsel could then track the litigation calendar against the compliance dates, with a written trigger for when preparation turns into execution.

A written trigger might read: “If the court has not ruled by a set date, sixty days before our first compliance date, we sign the audit engagements and begin producing statements in the prescribed format.” Writing it down in advance removes the temptation to keep waiting, and gives the board a clear point at which spending begins.

Pricing the option to wait

Preparing without committing amounts to buying an option. The firm pays a small, known cost now, in quotes, templates and staff time, for the right to commit later at short notice. The value of that option depends on two lead times: how long the court is likely to take, and how long execution takes once the trigger fires.

The second lead time varied by item. A first-time audit of a fund needs an independent accountant that meets the custody rule standard, opening balances that can be audited, and enough fieldwork time before the reporting deadline. Auditor capacity tightens when an entire industry wants the same service by the same date. Opinions for adviser-led secondaries, by contrast, are bought deal by deal, so a firm with no secondary planned before the compliance date had almost nothing to prepare. The trigger for audits therefore needed to fire much earlier than the trigger for opinions.

Firm size changed the arithmetic. Larger advisers faced a September 2024 date for three of the rules and would have had to start execution in the spring or early summer. Smaller advisers had until March 2025 for everything, which gave the court more time to rule before any money had to move. A single, firm-wide trigger date was simpler, but a trigger per rule matched the real lead times better.

A documented decision to stage spending should not read to an examiner or auditor as a plan to ignore the rule. No obligation exists before the compliance date. What matters is that the firm can show it monitored the litigation, priced the work, set its triggers early enough to comply on time, and would have met the dates had the rule survived. A board minute and a dated project plan are that evidence.

Adviser-led secondaries deserved a separate look even in this column. Continuation funds, the new vehicles created to buy assets from an older fund in these deals, were growing quickly, and investors were already pressing advisers on how prices were set when the adviser sat on both sides. A firm that planned more of these transactions could reasonably decide to obtain independent opinions anyway, as a negotiating asset with investors, and move that line item into the first column.

Hedge fund managers had their own rule-only item. The ban on preferential redemption rights and preferential portfolio information, unless offered to all, would have changed how new share classes and side letters were negotiated. Legacy status protected existing agreements, so the work fell on new funds and new investors. A sensible preparation step was to flag every pending negotiation that touched liquidity or transparency terms, draft fallback language, and hold it until the trigger.

Building the ledger and registers in practice

For an executive, the useful question is what this work actually involves week to week. It is mostly unglamorous, and that is why it often does not get done until something forces it.

The ledger usually starts with an inventory. Finance lists every type of fee and expense each fund has paid over a set period, where the figure comes from, and which document governs it: the fund agreement, a side letter, an allocation policy or a board approval. Gaps show up quickly. Some expenses have no clear rule. Some offsets depend on one person’s knowledge. Some affiliated service fees appear in the administrator’s reports under generic labels.

Next comes consolidation. The firm decides where the single ledger will live, which might be the existing accounting system, a module from the fund administrator or a dedicated tool, and sets a monthly or quarterly routine for reconciling it with the administrator’s books. The software matters less than having one agreed version of the numbers, with a named owner.

The registers follow a similar pattern. Legal and investor relations gather every side letter and every affiliated service arrangement, extract the obligations into a structured list, and assign each one an owner. Once the register exists, it needs a habit to keep it current: every new side letter gets entered before the fund closes, and every notice event is checked against the list.

Owners, sequence and measures

The sequence matters because each step depends on the last. The expense inventory comes first, since the ledger design depends on what it reveals. The allocation policy is reviewed next, because a ledger built on an ambiguous policy records ambiguity at scale. The registers can run in parallel with a separate team, as they draw on legal documents rather than accounting data.

Ownership splits naturally. The chief financial officer or fund controller owns the ledger and the offset calculation. The general counsel owns the side-letter register, with investor relations responsible for entering new terms before each closing. The chief compliance officer owns the affiliated service provider register and the testing of all three, which keeps the people who build each record separate from the person who checks it.

A few measures show whether the work is real. The share of expense lines that cite a governing document should approach all of them. Manual adjustments to the ledger each quarter should fall over time. The time to answer a standard fee and expense question from an investor should be measured in days. And the side-letter register should be tested by picking recent notice events and confirming that every investor owed notice received it.

The work needs no large technology project, only a few people with time set aside, a sponsor senior enough to get answers from several departments, and a clear finish line.

Three columns in the boardroom

The triage also had a governance benefit. A chief compliance officer who presents the board or management committee with three columns, and a spend figure under each, can explain why most of the budget is safe and how much is at risk. That is a more defensible position than either building everything on the regulator’s timetable or waiting for a court.

The method connects compliance to the things leaders already manage. Money: it separates spending that pays off in any scenario from spending that is a bet on the litigation. Investors: it puts the emphasis on the reporting and transparency clients value. Regulators: it keeps firms focused on duties that do not depend on any single rule, which is where enforcement risk actually sits. Staff: it gives finance, legal and investor relations teams a clear order of work rather than an all-at-once scramble.

Suppose a firm’s board meets in late 2023. The chief compliance officer shows three columns. The first, the fee ledger and investor reporting improvements, accounts for the largest share of spending and is funded from the fundraising budget. The second, allocation records and the two registers, is smaller and treated as overdue housekeeping. The third, audits, opinions and the prescribed statement format, is held at quotes and draft templates, with a written trigger date. A director asks what happens if the court upholds the rule. The answer is ready: the trigger fires, engagements are signed, and the firm is on schedule. A director asks what happens if the rule is struck down. The answer is equally ready: most of the spend still pays off.

Items that straddle columns

Some items do not sort cleanly, and the method has to handle them honestly. An audit for a fund whose investors had already asked for one is partly investor demand and partly rule. A preferential treatment disclosure is partly existing duty, since misleading investors about who got better terms was already risky, and partly a new prescribed notice. The workable approach is to split such items: fund the part that stands on its own, and hold the increment the rule adds.

The sort also needs revisiting. A column assignment made in September 2023 reflected what investors were asking for then and what counsel thought of the litigation then. A quarterly review, with any reclassification minuted, keeps the board’s picture current and stops an early judgment from hardening into an assumption.

The strongest objection

The best argument against triage is that it costs money itself and can look like hedging. Sorting dozens of obligations, pricing each and writing triggers takes senior time from finance, legal and compliance. A board might prefer one simple instruction: comply on the regulator’s timetable. For a firm with a small budget at stake, that may be the right call, because the analysis can cost more than it saves.

The answer depends on the size of the third column. Where rule-only work is a small share of the total, triage adds little. Where it is large, as it was for advisers facing new audits, new statement production and new opinion processes, the analysis pays for itself. The method also produces something a simple instruction does not: a record of why money was spent, which helps with investors, auditors and examiners whatever the court decides.

The same logic applies far beyond private funds. A bank facing a contested capital rule, a hospital awaiting a delayed federal requirement or a company watching proposed state privacy laws can ask the same three questions of every work item: would customers want this anyway, does existing law already require it, or does it exist only because of the new rule?

The answers differ by industry, but the pattern repeats. For a bank facing a contested capital proposal, cleaner data on the exposures behind its capital calculation helps internal risk management whatever the final rule says, while a prescribed reporting template is pure rule. For a hospital waiting on a delayed federal data-sharing requirement, better patient identity matching serves care and billing today, while a specific certification step may never arrive. Across industries, the first two columns tend to hold most of the value, and the third most of the uncertainty.

Where firms saved and where they wasted

A firm that handled this well could point to a fee and expense ledger per fund, allocation decisions recorded with their reasoning, registers of affiliated service providers and side-letter obligations, and a short list of rule-only items with quotes in hand and a written trigger. Its board had seen the three columns and agreed the budget for each.

The costly errors ran in both directions:

• Building to the deadline. Treating every obligation as equally certain wasted money on rule-only items when the rule later fell.
• Waiting for the court. Treating every obligation as equally uncertain left firms exposed on duties that never depended on the rule.
• Fixing the format, not the data. A neat statement template built on scattered spreadsheets produces neat-looking errors.
• Leaving side letters in a drawer. Obligations that nobody has extracted are obligations nobody can reliably meet.
• Trusting AI extraction unchecked. Language models can speed up the first pass; lawyers still need to verify every result.
• Letting the vendor define the data. An administrator’s standard report is not a fee and expense ledger, and adopting it unchanged leaves the adviser unable to answer its own investors.
• Writing one trigger for everything. Audits, statements and opinions had different lead times, so a single date was too early for some and too late for others.

The errors had a common root. Each treated the rule as the only reason for the work, either by doing everything because the rule demanded it or by doing nothing because the rule might fall. The firms that came through best asked why each piece of work was worth doing, and found that most of it had reasons older and sturdier than the rule.

Sorting your own compliance plan

• For each item on our compliance plan, is it something investors want anyway, something existing law already requires, or something only the new rule requires, and how much of our budget sits in each column?
• Can we produce each fund’s fees and expenses from one ledger, with every line traceable to its source and allocation rule?
• Do we record expense allocation decisions when we make them, with the reasoning and the approver?
• Do we have a complete register of side-letter obligations, and do we use it to send the notices we owe?
• For rule-only items, what is our written trigger for moving from preparation to spending?

With hindsight

The legal challenge succeeded. On June 5, 2024, a three-judge panel of the Fifth Circuit vacated the private fund adviser rules in their entirety, holding that the SEC had exceeded its statutory authority. To vacate a rule is to wipe it off the books rather than pause it. The SEC did not seek further review, and the compliance dates fell away.

The reasoning mattered as much as the result. The court read section 211(h) of the Advisers Act, added by the Dodd-Frank Act, as reaching retail customers, not investors in private funds. It held that section 206(4), the antifraud rulemaking power, requires the SEC to define the fraud a rule is meant to prevent, and found that the agency had largely failed to do so. It also stressed that Congress had deliberately left private funds free to negotiate their own governance terms. Having found no authority, the court did not reach the other arguments.

The vacatur was wider than many firms expected. It took with it the books and records amendments and the compliance rule amendment requiring every registered adviser to document its annual review in writing, which had applied since November 2023. In November 2024 the SEC adopted technical amendments removing the vacated provisions from the Code of Federal Regulations.

That outcome tested the triage, and each column behaved as expected. The first category of work kept paying off. In 2025 the Institutional Limited Partners Association released an updated reporting template and a new performance template, and later that year refreshed its capital call and distribution template to match. Investors gained a common format to demand in side letters and due diligence rather than relying on a rule. Transparency that the SEC could not mandate, investors could still request, and managers with a clean fee and expense ledger were ready to provide it.

The second category also held. The vacatur left the Advisers Act’s antifraud provisions, and the fee, expense and conflict duties built on them, untouched. The agency’s leadership and rulemaking agenda changed in 2025, with Paul Atkins becoming chair in April, but a new commission’s priorities do not shorten the limitations period for conduct already on the books. Firms that had documented their allocation decisions and built side-letter registers still had evidence of doing the right thing, which is what an examiner, an auditor or an investor would ask for.

The third category is where firms that built in full lost money. Audits arranged only because the rule required them, statement processes built to a prescribed format and opinion providers retained in advance became costs without a mandate. The timing made the loss uneven. The court ruled about three months before the first compliance date, so larger advisers working to September 2024 had committed more than smaller ones working to March 2025. Firms that had prepared without committing lost far less.

One assumption held less well than the method implied. Investor demand turned out to be real but voluntary, and voluntary standards spread unevenly, investor by investor and fund by fund. A manager whose investors never asked could reasonably let the ledger slip down its list, which is why the empirical test of counting actual requests mattered more than any general prediction about the market.

The episode also reset expectations about rulemaking. Under the court’s reading of the statute, broad, prescriptive rules for private fund advisers would need new legislation or a much narrower theory of fraud. For now, transparency in private funds runs mainly through contracts, investor templates and case-by-case enforcement of existing duties.

What remains is a reusable method rather than a one-off story. When a rule is contested, the useful question is which parts of the work stand on their own, more than whether to comply at all. Funding those confidently, and preparing the rest without committing, protects both the budget and the firm’s standing with investors and regulators.