Despite the recent hubbub around transparency around private fund fees and expenses, 25 percent of fund managers do not deliver or offer to deliver Part 2A of Form ADV to their limited partners, according to a recent poll during an ACA Compliance webinar.
Part 2A is required for all SEC registered investment advisers, and includes itemized disclosures in such areas as fees and expenses and conflicts of interest. Rule 204-3(b) requires any registered investment adviser to deliver all of Part 2 to clients or prospective clients annually or before entering into an investment contract. Investors can still access the form on the SEC's website, but some LPs believe delivery of the form without request is a best practice.
However, for private fund managers, the term “client” technically refers to the fund and not the investors in the fund. While 75 percent of the private fund managers polled said that they still deliver or offer to deliver Part 2A to their limited partners despite the definition of the term, the remaining one quarter said they do not.
ACA also provided some additional guidance on Part 2. While fund governing documents may use broad language on fees and expenses, SEC examiners expect more explicit disclosures in Part 2A Item 5, such as whether private jets, rent or employee salaries are considered expenses. Managers can use Part 2A Item 10 as a catchall for any conflicts of interest disclosures that do not fit in other categories, such as a co-investment allocation process.
Finally, ACA reminded participants that Part 2B is required for any employee who formulates investment advice for a client and has direct client contact as well as any employee who has discretionary authority over a client's assets, even if it they have no direct client contact. Each of these employees must file a separate Part 2B.