Final Private Fund Reforms: Details and Obstacles of the Quarterly Reporting Requirements (Part Two of Three)

Legal Analysis 5 October

Final Private Fund Reforms: Details and Obstacles of the Quarterly Reporting Requirements (Part Two of Three)

By Rorie A. Norton and Vincent Pitaro

Private Equity Law Report

A central tenet of the SEC’s recent rulemaking initiatives is to increase the amount of disclosure and reporting provided to investors by fund managers. Consistent with that objective, the final rules (Rules) for private fund advisers that were issued by the SEC on August 23, 2023, contain specific requirements in Rule 211(h)(1)‑2 thereof for the delivery of quarterly statements addressing fees, expenses and performance information. The Rule applies to any private fund – other than a securitized asset fund – that has at least two full fiscal quarters of operating results.

In the adopting release (Release), the SEC asserted the information required under the Rule is an “essential component of the basic set of information that is generally necessary for private fund investors to evaluate accurately and confidently their private fund investments.” Consequently, there are no exemptions for small or emerging advisers, and the requirement cannot be waived.

This second article in a three-part series parses the parameters of the quarterly reporting requirements and highlights several issues that fund managers may confront in their attempt to comply. The first article provided a brief overview of the Rules as a whole and a deep dive into the five categories of restricted activities. The third article will highlight considerations in the other Rules.

See “Quarterly Reporting Requirements and Prescriptive Prohibited Activities in the SEC’s Proposed Amendments to the Advisers Act (Part Two of Two)” (Mar. 22, 2022).

Logistical Requirements


The quarterly statements must include:

  • a table showing fund-level information;
  • a separate table showing information at the portfolio investment level; and
  • specified performance information.

The tabular format is required to ensure an orderly presentation, but the Rule does not mandate any particular format.

The Rule states that the quarterly statement must be written in “clear, concise, plain English [and] presented in a format that facilitates review from one quarterly statement to the next.” To that end, advisers are encouraged to use a “structured, machine-readable format” for the statements.

An adviser may include information in the statement beyond that required by the Rule, although the Release cautions it “must be as short as practicable, not more prominent than the required information, and not obscure or impede an investor’s understanding of the mandatory information.” Also, each set of reporting must include “prominent disclosure” of the criteria used, and assumptions made, when preparing the disclosures.


Advisers must consolidate reporting for similar pools of assets managed by the adviser or its related persons in a way that would not be misleading. The statement must be delivered to all investors in a private fund or to underlying investors of a pooled vehicle on a look-through basis if that vehicle is controlled by the adviser or its related persons. Advisers are permitted to distribute statements electronically in accordance with SEC procedures or notify investors that the statement is available in the adviser’s data room.

The proposed rule would have required all quarterly statements to be delivered within 45 days of the end of the relevant quarter. As adopted, for a private fund that is not a fund-of-funds, the statement must be delivered within 45 days of the end of each of its first three fiscal quarters of the fund’s fiscal year and within 90 days of the end of its fiscal year. The statement for a fund-of-funds must be delivered within 75 days of the end of its first three fiscal quarters and within 120 days of the end of its fiscal year.

The timing requirements for delivering quarterly statements are not too dissimilar from GPs’ existing practices, even if the format of disclosure and the level of detail required are likely markedly different, noted Schulte Roth partner Jennifer M. Dunn. The year-end statement will likely be a challenge, however, simply because of the array of other requirements at that time of year, she noted. “The year-end quarterly statement, audited annual financial statements, updates to Form ADV and other items all need to happen at that time. It’s just a lot for managers to handle,” she observed.

Further, the preparation and delivery of a manager’s first quarterly statement will likely be quite difficult for managers, Dunn asserted. “Similar to when Form PF was first enacted, this will require everyone to spend a lot of time deciding how to prepare the statement and coordinating both internally and with service providers to get all the required information,” she explained. “After managers decide on their format and template, future filings will be much easier because they probably won’t want to change it very much quarter over quarter.”

See our two-part series: “Key Provisions for PE Sponsors in the Final Amendments to Form PF and Relevant Departures From the Proposal” (Jun. 29, 2023); and “Overarching Takeaways From the Final Form PF Amendments and Suggestions for How PE Sponsors Can Prepare to Comply” (Jul. 13, 2023).


An adviser will be required to retain:

  • a copy of each quarterly statement distributed;
  • a record of each recipient and the date the statement was sent;
  • records evidencing how the fees, expenses, performance and other information in the statement were calculated; and
  • a record detailing how the fund was deemed liquid or illiquid.

Fee and Expense Reporting

All fee, expense and portfolio investment compensation information must be presented both before and after the application of any offsets, rebates or waivers. Both tables must include “prominent disclosure” of how expenses, allocations, rebates, waivers and offsets are calculated, as well as cross-references to the sections of the fund’s offering documents that describe the relevant calculation methodology.

Contents of the Fund‑Level Table

The fund information table must include:

  • a detailed accounting of all compensation, fees and other amounts paid to the adviser or its related persons during the accounting period, with a separate line item showing each category of payment, including, without limitation, performance-based compensation, and management, advisory, sub-advisory and similar fees, along with the total dollar amount for each category;
  • a detailed accounting of all other fees or expenses allocated to or paid by the fund, with separate categories that include, but are not limited to, organizational, accounting, legal, administration, audit, tax, due diligence, and travel fees and expenses; and
  • the amount of any offsets or rebates carried forward during the reporting period to future periods that will reduce payments or allocations to the adviser or its related persons.

The Rule defines “performance-based compensation” to include “allocations, payments, or distributions of capital based on [a] private fund’s (or its investments’) capital gains, capital appreciation and/or other profit.”

Notably, there are no de minimis exceptions, and advisers may not group expenses into broad categories or label them as “miscellaneous.” In addition, the Rule clarifies the table must cover expenses “paid by” and those “allocated to” the private fund. Ironically, that clarification “introduces a timing issue given that some fees and expenses are incurred and yet may not be allocated to a fund until a later time,” observed Schulte Roth partner Allison Scher Bernbach.

Drilling down on that point, Cleary Gottlieb partner Maurice R. Gindi noted the confusion is around whether the Rule treats the incurrence and the allocation of fees and expenses as the same thing, which is relevant in several contexts, such as investigation-related payments. “Managers will need to determine whether reporting is triggered when an expense is fronted by a manager or only when it hits the profit and loss statement of the fund,” he explained.

Absent further clarification from the SEC, fund managers will need to identify a clear and consistent path forward until standard market practices are settled. “From an operational perspective, it requires managers to figure out the timing of all the inflows and recording of fees and expenses and then at which point they get put on the quarterly statement,” Bernbach said.

See “Benchmarking Analyses and Other Solutions to Avoid Charging Funds Improper Fees and Expenses for Affiliate Services” (Feb. 9, 2021); and “OCIE Risk Alert on Private Funds: Focus on Conflicts; Fees and Expenses; and MNPI (Part One of Two)” (Aug. 25, 2020).

Scope of the Portfolio Investment Table

The portfolio investment table must include a detailed accounting of all “portfolio investment compensation” allocated or paid to the adviser or a related person by each portfolio investment during the reporting period, with a separate line item for each compensation category and the total amount paid.

“Portfolio investment compensation” includes fees or other amounts paid to the adviser or a related person that are attributable to the fund’s investment in a portfolio company. Those include, but are not limited to, fees or compensation for management, consulting, monitoring, administration, advisory, trustee or director services. The Rule does not capture dividend payments, profit distributions, returns of capital or similar payments from a portfolio investment to the fund. It is intended “to capture potentially or actually conflicted compensation arrangements,” the Release explains.

For purposes of the Rule, a portfolio investment includes any entity in which the fund holds an interest, whether directly or indirectly. The portfolio investment table should generally disclose “the identity of each covered portfolio investment to the extent necessary for an investor to understand the nature of the potential or actual conflicts associated with such payments,” according to the Release. In a change from the proposed rule, the table is not required to specify the fund’s ownership percentage in the portfolio investment.

Compliance Challenges

Difficulty of Procuring and Categorizing Information

The first and arguably most difficult step when preparing the fee and expense tables in quarterly statements is for fund managers to obtain information about all their funds’ fees and expenses. “Although the Release speaks to that issue, I don’t think it’s all that practical in terms of how some large sponsors, for example, are going to be able to gather all of the information,” argued Fried Frank partner Jessica Forbes.

Particularly at the outset, fund managers will need to work closely with their internal departments and their third-party service providers – especially fund administrators – to track that information. “For the most part, compliance with this element of the Rule is an exercise of gathering data, identifying data sources and trying to collect data from potentially difficult-to-collect parties,” Forbes opined.

See “How Lawyers Can Leverage the Shifting Environment to Enhance Compliance Programs” (Dec. 1, 2022); and “Compliance Challenges in the Current Environment: Dealing With Ongoing Changes at the SEC (Part Two of Two)” (May 24, 2022).

From there, fund managers face the challenge of identifying and categorizing expenses. “There is a little art to the process based on where managers draw the lines around the various categories of expenses, as well as some science behind how each type of expense is classified into one of those categories,” Bernbach reasoned.

Determining the categories of expenses requires considering real questions around how detailed fund managers need to be, said Igor Rozenblit, founder and partner at Iron Road Partners and former Co‑Head of the SEC’s Private Funds Unit. “A good place to start is to use the expense categories listed in the [limited partnership agreements (LPAs)],” he suggested. “Although some LPA disclosures are broad, other managers have decided to list every fee and expense they can think of in their LPAs, which will put them in a good position to categorize going forward.”

Finally, after all of that legwork, fund managers will need to sort their actual expenses into those categories, which is less straightforward than it seems, Bernbach cautioned. “Some fees and expenses may cross different categories or can arguably be treated in one category versus another.”

Attorneys interviewed by the Private Equity Law Report agreed that it would be quite a substantial lift for managers to perform each step before delivering their first set of quarterly statements to investors. It will likely get better with time, however. “Eventually, managers will operationally build systems to hopefully automate the compilation and bucketing of different types of expenses in the different categories,” posited Willkie Farr partner Anne C. Choe. “Even then, somebody at the manager will need to spend a lot of time double- and triple-checking that all data was thoroughly and accurately delivered so the manager doesn’t end up facing an SEC examination,” Forbes warned.

Ambiguity Around Related Persons

Several commentators cited potential complications around sourcing and categorizing expenses borne by a fund or portfolio investment for fees or compensation paid to related persons. Under the Rules, “related persons” include the adviser’s officers, partners, directors and current employees (other than those in purely clerical, administrative or similar roles), as well as persons directly or indirectly controlling, controlled by or under common control (collectively, Control) with the adviser.

To start, it is sometimes unclear when and whether related persons fall within the scope of the Rule, Rozenblit noted. “For instance, it is unclear if it captures the fees and expenses associated with operating partners who are not employees of an investment manager and might not be under common Control with that investment manager,” he explained. “Further, if it is included, then there is the added difficulty of capturing that data because you don’t normally have access to that person’s books and records.”

See “SEC Fines PE Sponsor for Passing Operating Partner Expenses Through to Investors Without Adequate Disclosure” (Jun. 9, 2020); and “Compliance Considerations for PE Firms Engaging Operating Partners” (May 14, 2019).

The real issue, however, is when you extrapolate those related person challenges to very complex organizations with multiple related persons that must compile the data in a limited period each quarter, Bernbach asserted. To illustrate that point, Gindi posited a scenario in which a large fund manager operates multiple funds of funds that invest in underlying PE funds that themselves invest in a lot of different portfolio companies. “That manager would be required to report “any potential compensation potentially payable by any of those underlying portfolio companies to any entity under common Control with the manager - that’s a massive universe,” he emphasized.

As daunting as that all seems, the SEC at least included helpful guidance that the related person definition is intended to be consistent with the version in Form ADV, Gindi assured. “Most sponsors have probably developed a framework to deal with related persons in that context, so they can probably look to that existing framework and then determine whether any additional adjustments are needed to comply with the Rule,” he reasoned.

See “Procedural Shortcomings and Unexpected Interpretative Issues That Complicate Sponsors’ Form ADV Filings” (Mar. 8, 2022).

Performance Reporting

The performance information an adviser must present depends on whether the private fund is an “illiquid fund” or a “liquid fund.” As defined in the Rule, an illiquid fund is not required to redeem investor interests on request and offers limited or no opportunities to withdraw before the fund’s termination. Any fund that is not illiquid is a liquid fund. Notably, the SEC clarified that PE funds will still be deemed illiquid if they provide traditional withdrawal rights for certain regulatory events or extraordinary circumstances.

In addition to the distinct information for liquid and illiquid funds described below, the quarterly statements must also disclose:

  • the value and date of each of the fund’s capital inflows and capital outflows since inception; and
  • the fund’s net asset value as of the end of the reporting period.

The Release cautions that the interests of the adviser and its affiliates in the fund generally should be excluded from the performance calculations “to prevent the performance from being misleading,” which could occur because those interests do not pay management or performance fees.

In addition, the Release stresses the need for standardized performance metrics for investors to be able to compare, understand and monitor their investments, as well as understand the impact of fees, expenses and performance-based compensation.

See our two-part series on an SEC FAQ on the Marketing Rule: “How to Present Individual Positions and Deal With Attribution Issues” (Apr. 6, 2023): and “Practical Implications and Special Q&A With CCOs” (Apr. 20, 2023).

Distinguishing Between Liquid and Illiquid Funds

A liquid fund’s quarterly statement must show:

  • annual net total returns for each of the past ten years or, if shorter, from inception;
  • average annual net total returns over the most recent one‑, five‑ and ten‑fiscal‑year periods; and
  • cumulative net total return for the current fiscal year as of the end of the most recent fiscal quarter.

The Rule does not define “net total return.” Unlike the proposed rule, the final Rule does not require the adviser to present performance from inception for funds that have been in existence for more than ten years, nor does it require a calendar year reporting period.

Alternatively, the statement for an illiquid fund must show, from the date of the fund’s inception through the end of the most recent quarter covered by the statement (or the most recent practicable date if quarter-end numbers are not reasonably available):

  • internal rate of return (IRR) and multiple of invested capital (MOIC) both net and gross of all fees, expenses and performance-based compensation borne by the fund; and
  • gross IRR and gross MOIC for both the realized and unrealized portion of the fund’s portfolio.

Each metric must be presented both with and without the impact of fund-level subscription facilities, which include any subscription or capital lines of credit or other indebtedness secured by investors’ unfunded capital commitments. To be clear, performance without such impact must be calculated as though the fund had only called investor capital. Performance with such impact, however, should reflect the fund’s actual capital activity, including both capital calls and all subscription facility borrowings.

In light of the foregoing, preparing the performance calculations for quarterly statements is one area that is more difficult for PE funds than their hedge fund counterparts. “Not only do managers of illiquid funds have many more performance metrics to calculate, but PE funds also need to go back to the inception of their funds as part of those calculations,” Forbes observed. “That is a material difference given that some PE funds on the market are upwards of 15 years old.”

See our two-part series: “Fundamental Flaws of IRR and How Sponsors Can Avoid Distorted Calculations” (Nov. 12, 2019); and “Practical Steps Investors Can Follow to Diligence Flawed IRR Calculations” (Nov. 19, 2019).

Addressing Hybrid Fund Structures

Compared to the Rules, Form PF has more stringent requirements for liquid funds, and the definition therein captures a lot more vehicles because triggering any of the three specified factors in the Form PF definition results in being categorized as a liquid fund, Rozenblit noted. Although the definition in the Rules is more straightforward because it is only based on investors’ ability to redeem or not, it may be difficult to categorize certain types of funds that straddle the liquid and illiquid spheres.

For example, hybrid funds may end up being considered liquid for the purpose of their quarterly statements. “A lot of hybrid funds invest a significant portion of their portfolio in illiquid investments but permit redemptions after a long lockup and notice period, and potentially only to the extent there are liquid assets available to fund the redemption,” Forbes noted. Considering the simplistic definition of illiquid funds in the Rules, however, those hybrid funds may end up being treated as liquid funds, she cautioned.

The problem is that many hybrid funds may functionally think of themselves as illiquid PE funds and, therefore, have historically delivered performance reports using IRR and MOIC, as appropriate. “If managers of hybrid funds now have to go back and report performance as a liquid fund using the concept of net total return, then that would constitute a major shift and probably require a lot of time and effort for managers to figure out their new reporting responsibilities,” suggested Willkie Farr partner Mark Proctor.

Some could argue, however, that the simplistic definition offered by the SEC may afford managers a fair amount of flexibility when deciding whether their hybrid funds are liquid or illiquid, Proctor opined. “I can see situations in which two funds in the same asset class, such as open-end real estate funds, take different views on whether they are liquid or illiquid under the Rules,” he suggested. “Industry standards will develop, and it’ll be interesting to see if all funds end up harmonizing or if splits emerge among funds essentially doing the same thing but categorizing themselves differently.”

See “When East Meets West: Ten Considerations for VC Managers Launching ‘Evergreen’ Funds and Hedge Fund Managers Launching PE Funds” (Aug. 3, 2021); and “Structural and Operational Considerations for Hybrid Funds” (Feb. 23, 2021).

Timing Complications

One challenge PE sponsors face is preparing the required calculations in time to deliver quarterly statements within 45 days of the first three fiscal quarters, and 90 days for the fourth quarter, Forbes stated. “It is hard to revalue a significant portfolio in that amount of time and, operationally, financial people at firms will struggle to get the requisite figures and perform the calculations in time,” she explained. Proctor agreed, noting that sponsors typically avoid any performance reporting timelines when negotiating fund terms and, when necessary, try to get 60 days from a quarter’s end to avoid operational issues.

The SEC did, however, helpfully clarify that if numbers are unavailable for the most recent quarter, then fund managers can look back at the previous quarter, Proctor noted. “The ability to rollover numbers is particularly useful when there’s no material change to the portfolio, although managers can only get away with that for three quarters. At year’s end, they have to revalue, but at least they get more time and can get started a bit early,” Rozenblit added.

Even if there are no valuation changes in a quarter and sponsors decide to roll over their numbers, Forbes cautioned that sponsors will still have some work to perform. “The net calculations need to be net of all expenses, so managers need to roll forward the fees and expenses from the quarter and perform the calculations,” she explained. “Also, many PE funds invest in some liquid assets, and their valuation policies may not allow them to roll the value of those investments from one period to the next.”

For those reasons, Forbes encouraged sponsors to get out ahead of the Rules’ effective date by starting to calculate their funds’ performance metrics in these newly required ways. “For a fund that is 15 years old, sponsors will need to look through information from 15 years to calculate, for example, both the net and gross IRR without giving effect to their subscription facility since, historically, they probably only calculated that with giving effect to the facility,” she explained.

See “ILPA Subscription Credit Facilities Guidance: Reiterating the Need for Increased Disclosures on the Use of Facilities and LP Obligations (Part One of Two)” (Aug. 25, 2020).

Reconciling the Marketing Rule

Given that Rule 206(4)‑1 under the Investment Advisers Act of 1940 (Marketing Rule) was recently revised in December 2020, most industry observers expected the performance reporting elements in the Rules to dovetail with the requirements in the Marketing Rule. To everyone’s surprise, however, the respective rules not only do not overlap but also contain several material inconsistencies that sponsors will need to navigate.

See “A Checklist for Advisers to Guide Compliance With the Marketing Rule” (Oct. 25, 2022).

First, the Rules require sponsors to show fund returns on a consolidated basis rather than calculated on an investor-by-investor basis or net of the highest fee, Forbes said. “Even if a fund has different sleeves or investors paying different fees, sponsors need to prepare blended figures that are net of fees, which is different from the Marketing Rule,” she explained. “There has been little to no guidance from the SEC on the Marketing Rule and whether that’s permissible, so it feels like an oversight in the Rules.”

Also, when sponsors have historically calculated their gross performance figures, certain figures may not be true “gross” figures because managers would net out the management fee charged to investors, Choe noted. “Now that the Rules contain a specific definition of gross IRR and gross MOIC that differs from the Marketing Rule’s definition of gross performance, certain managers may need to change how they calculate their performance information.”

Further, the Rules specifically mention that performance reporting for illiquid funds needs to include both gross and net fund-level performance calculations, as well as gross calculations of the fund’s realized and unrealized performance, Gindi observed. “In the Release, the SEC explained that only gross figures are needed for the realized and unrealized performance reporting because otherwise certain assumptions and judgment calls would be needed, which would, ultimately, make that information unhelpful,” he noted. In the Marketing Rule, however, all of the SEC’s statements suggest that anytime gross figures are included, the sponsor also needs to provide net calculations. “Those approaches seem at odds with one another,” he reasoned.

As sponsors prepare quarterly reports under the Rules, they need to consider how the aforementioned discrepancies, among others, impact their obligations under the Marketing Rule. Although the Release clarified that the SEC “generally” does not consider the information required by the Rule to be an “advertisement” under the Marketing Rule, it did caution advisers to consider if any additional information provided in a statement would be. “In short, sponsors will need to choose whether their quarterly statement will functionally supplement the marketing materials they have historically provided or whether they want to change the way they provide information to prospective investors,” Choe summarized.

See “Challenges and Lessons From the First Six Months of Complying With the New Marketing Rule” (Jun. 1, 2023); and “Eleven ‘Top of Mind’ Questions and Misconceptions Surrounding the New Marketing Rule” (Mar. 22, 2022).