- Private equity compliance: A framework for fund growth
- Why private equity compliance is a strategic advantage
- The evolving regulatory landscape for private funds
- The core pillars of a private equity compliance program
- Fee and expense compliance
- Conflicts of interest and investor disclosures
- Portfolio valuation compliance
- AML and KYC compliance
- The SEC marketing rule
- Data security and material non-public information
- Record-keeping and audit readiness
- Scaling compliance from emerging manager to established firm
- How a platform creates a single source of truth for compliance
- Building an institutional-grade compliance function with Carta
- Frequently asked questions about private equity compliance
- How can our firm proactively identify fee and expense allocation and distribution waterfalls discrepancies?
- What are the consequences of poor record-keeping during an SEC examination?
- What are the key elements of a strong culture of compliance?
- How should our firm document expense allocations to withstand SEC scrutiny?
Why private equity compliance is a strategic advantage
For a private equity firm, compliance refers to the framework of policies and procedures designed to ensure the firm and its funds operate in accordance with regulatory requirements and commitments made to investors. Rather than viewing it as a cost center, fund CFOs and finance professionals should see a strong compliance program as a strategic asset. It builds essential investor trust and creates the operational foundation necessary for scalable growth.
In today's fundraising environment, sophisticated limited partners (LP) conduct deep operational due diligence, with many making formal checks a standard part of their process. For example, LPs typically require an annual audit of the funds they invest in—a requirement that is often only waived for the smallest, non-institutional funds. In an alternative investment market where investors are increasingly selective, a robust, technology-driven compliance function is a key differentiator that signals this expected level of institutional quality.
The evolving regulatory landscape for private funds
To build a strategic compliance function, you first need to understand the rules of the road. The regulatory requirements for private funds are constantly changing, with government agencies proposing, adopting, and in some cases, vacating new requirements. For example, the U.S. Court of Appeals for the Fifth Circuit vacated the Securities and Exchange Commission’s (SEC) private fund adviser rules in 2024, less than a year after the SEC finalized the set of rules—illustrating how quickly rules can shift and why a modern fund CFO and compliance officer must stay ahead of them to protect the firm and its investors.
This active dialogue is exemplified by recent legislative efforts like the INVEST Act. Proposed changes that will broaden investor accreditation may help emerging managers find more potential investors. Understanding these key regulations and enforcement trends is the first step toward building a resilient compliance program.
In emerging sectors like crypto, for instance, a single summer can bring a wave of new regulation, including new legislation from Congress, competing bills from the House and Senate, and new strategic initiatives from the SEC.
Understanding the differences in compliance obligations is critical for your firm, especially as timelines shift; for instance, FinCEN and the U.S. Treasury announced a two-year delay for the private fund AML/KYC rule, pushing back the compliance deadline with anticipated changes to come.
The core pillars of a private equity compliance program
For a modern CFO, effective fund management and private equity (PE) compliance is not a checklist of potential risks, but a strategic, integrated compliance program. A defensible compliance program is built on several core pillars. Mastering these fundamental areas is essential for risk management, satisfying regulators, and maintaining the trust of your LPs.
These pillars include maintaining integrity in fee and expense management, fostering transparent investor relations, conducting defensible valuations, ensuring robust anti-money laundering (AML) and know-your-customer (KYC) processes, and adhering to compliant marketing practices. By mastering these areas, you create a resilient framework that supports your fund's growth and reputation.
Fee and expense compliance
Fee and expense allocation is a critical component of fund accounting, involving the process of correctly assigning costs to either the fund, special purpose vehicle (SPV), general partner (GP), or the management company, as dictated by your specific fund structure and legal documents. This is a primary focus area for the SEC, and getting it wrong can lead to significant penalties.
A common pitfall for fund managers is incorrectly charging fund-related expenses to the management company, or vice versa. A common pitfall for fund managers is charging management company expenses to the fund, rather than keeping them at the management company level. This misallocation arises from the complex financial relationship between the two entities and is a key focus area for LPs and regulators. The management company is responsible for overhead costs like salaries and rent, but often makes initial payments for fund-attributable expenses and is then reimbursed.
This can also happen when management fees are miscalculated due to an inaccurate net asset value (NAV), which is directly connected to portfolio valuations. Since a common methodology for calculating management fees is based on the fund’s NAV fees, an inaccurate valuation can lead to charging incorrect fees. This underscores the need for a robust, well-documented, and consistently applied portfolio valuation policy to ensure fairness and accuracy.
Regulators pay close attention to how expenses are handled, and simple mistakes can lead to scrutiny. The misallocation of adviser expenses continues to be an area of enforcement, in part because fee structures themselves can be surprisingly complex. For example, the majority of venture funds have provisions to reduce management fees over time, but the structure of these step-downs varies widely: 81.9% of funds implement at least one, and more than a third have four or more.
Common allocation errors that can attract regulatory attention include, but are not limited to:
Charging costs incurred when you start a PE fund to the wrong entity
Misclassifying general overhead, such as office rent, as a fund expense
Failure to offset management fees by income earned by applicable portfolio companies
Relying on manual tracking in spreadsheets is an outdated and error-prone method for managing these critical details. This approach makes it difficult to prove to auditors or regulators that your allocations are correct and consistent, which can lead to compliance risks. While no system is entirely immune to human error in data entry, a modern approach utilizing an event-based general ledger significantly reduces these risks by recording every transaction as it occurs. This creates a complete and auditable trail that makes your fee and expense allocation more robust and readily defensible.
Conflicts of interest and investor disclosures
Another pillar of compliance is managing conflicts of interest through what regulators call full and fair disclosure. This means moving beyond internal financial controls to embrace external transparency with your LPs.
As a GP, you have a fiduciary duty to act in the best interest of your fund and its investors. This legal obligation means you must either eliminate or provide full and fair disclosure of all potential conflicts of interest. A conflict of interest is any situation where the firm's interests may not align with the interests of its LPs.
Common examples of conflicts of interest include, but are not limited to:
Allocating a particularly attractive investment opportunity sourced through deal flow to a newer fund instead of an older one
Investing in multiple portfolio companies that transact with each other, or using continuation funds to extend asset hold times
Hiring a service provider that is owned by or has a close relationship with the firm or its employees
Offering different co-investment opportunities to different LPs without proper disclosure
Ensuring all LPs receive consistent, timely, and accurate information is a logistical challenge when you rely on email and generic data rooms. It's easy for an investor to be missed on an email chain or to receive an outdated document. A centralized LP Portal solves this by giving all investors a single, secure place to access disclosures, investor reporting statements, and other communications. This builds trust and mitigates compliance risk by ensuring everyone has the same information at the same time.
Portfolio valuation compliance
Accurate investor disclosures depend on having defensible portfolio valuation processes. A process is considered defensible when it is based on a consistent, documented methodology—such as internal policies aligned with industry standards—and supported by verifiable data points. An incorrect valuation can lead to miscalculated management fees and misleading performance reporting, which is a significant compliance failure that can damage investor trust and attract regulatory action.
Fund managers often face tedious data collection processes when preparing valuations, pulling information from multiple disconnected sources like spreadsheets, emails, and portfolio company reports. This manual process is inefficient and introduces a high risk of error.
An integrated PE software solution that connects directly to portfolio company cap table management systems solves this pain point. This connection reduces manual data entry and reconciliation work and supports more timely ownership and valuation updates that sync with the fund's accounting system. This creates a more streamlined and transparent valuation process for the fund and its stakeholders.
AML and KYC compliance
Funds in the private market face increasing scrutiny to ensure their operations are secure, transparent, and compliant with global regulations. At the heart of these efforts are AML/KYC programs. These processes are designed to prevent illicit financial activities and promote trust across the financial services ecosystem.
AML is a set of procedures and laws that prevent criminals from disguising illegally obtained funds as legitimate income. For your fund, this means having systems in place to detect and report suspicious activity.
KYC is the process of verifying the identity of your investors to assess their risk. This involves collecting and confirming information to ensure you know who you are doing business with.
Together, AML and KYC form a critical defense for your fund's integrity and are a non-negotiable part of a modern compliance framework.
The SEC marketing rule
Transparency is key to building and maintaining LP trust. This includes providing accurate and timely quarterly statements and distributing annual audited financials to all investors. These reports give LPs critical insight into fund performance and operations.
The SEC Marketing Rule is a key piece of private capital regulations that governs how investment advisers can advertise their services. A key requirement is that all claims, especially those about performance, must be substantiated and presented in a way that is fair and balanced. This means you can't cherry-pick your best-performing investments while ignoring the ones that didn't do as well.
Using stale or unverified data in marketing materials presents a significant compliance risk. If you make a claim about your track record in a pitch deck, you must have the data to back it up, and that data must be accurate and current. This connects back to the need for a single source of truth for all fund data.
Data security and material non-public information
PE professionals often gain access to material non-public information (MNPI) during portfolio monitoring when they sit on the boards of their portfolio companies. Material non-public information (MNPI) is confidential information that could affect a public company's stock price if it were released.
To prevent the misuse of this sensitive information, firms must have written policies and procedures, often called information barriers or "walls." It's also critical to have strong cybersecurity policies in place to protect both firm and investor data from unauthorized access.
Record-keeping and audit readiness
In the world of compliance, if an action or decision isn't documented, it effectively didn't happen. A clear, accessible, and unalterable record of every transaction, decision, and communication is the foundation of a defensible compliance program.
Without a centralized system, the annual fund audit can become a painful process of chasing down documents from disparate sources, answering endless questions, and spending weeks reconciling data. This isn't just an administrative headache; it's a significant financial drain. For venture capital funds that undergo an annual audit, the process consumes a substantial portion of their budget: The median fund with $1 million to $10 million in assets spends 17% of its operating expenses on audit fees, while even the largest funds devote nearly 14% of their fund operating expenses to the task.
Scaling compliance from emerging manager to established firm
Compliance is not a one-size-fits-all discipline; its demands evolve as a firm grows. The compliance foundation you build as an emerging manager will determine your ability to scale without accumulating operational risk and technical debt.
For an emerging manager building a track record, the primary goal is often to establish institutional credibility with limited resources. As PE firm Bochi Investments found, using a platform with built-in compliance for its SPVs allowed it to reduce overhead and focus on its PE investment strategies.
For a firm like Kayne Anderson, which manages billions in assets, an integrated platform is essential for maintaining compliance and providing clear reporting across its many funds and portfolio companies.
Firm stage | Key compliance challenge | Strategic solution |
Emerging manager | Establishing institutional credibility with limited resources. | Use standardized legal documents and a simple fee structure including profits interest allocations. Leverage an integrated platform for compliance from day one to avoid manual work and build a clean audit trail for fund accounting. |
Established firm | Managing complexity across multiple funds, co-investment vehicles, and diverse investor reporting requirements. | Implement a single, firm-wide compliance software platform that provides a consolidated view of all entities, automates complex calculations, and delivers tailored reporting to LPs. |
How a platform creates a single source of truth for compliance
The pillars of compliance cannot stand on their own; they must be connected by a single, reliable source of data. This is often called a single source of truth. It means having one central place where all your fund's critical information lives and is updated in real time. A fragmented approach using disconnected tools like spreadsheets, email, and separate data rooms is the enemy of good compliance, creating opportunities for error and inconsistency.
Fund professionals have been historically ignored by software innovation, forced to choose between expensive service providers who don't give them ownership of their data, or cobbled-together in-house solutions that don't scale. A modern fund administration software platform provides the ownership and control needed to manage compliance policies strategically. For PE firms like Legalist, having a unified platform for fund administration was key to scaling its complex private credit investments while maintaining control.
A platform-based approach provides several key benefits:
Centralized data: All fund, portfolio, and investor data lives in one place. This eliminates version control errors and the need for manual reconciliation between different systems, ensuring that everyone is working from the same set of information.
Automated workflows: Routine tasks like fee calculations, capital calls, and report generation are automated. This reduces the risk of human error that comes with manual data entry and frees up your team to focus on more strategic work.
Integrated system: Valuations, accounting, and investor reporting are all interconnected. This ensures consistency and accuracy across the entire compliance program, so a change in one area is automatically reflected everywhere else.
Building an institutional-grade compliance function with Carta
Managing modern PE compliance requires moving away from a patchwork of spreadsheets, email threads, and disconnected service providers. The complexity of today's regulatory environment and the expectations of institutional LPs demand a more sophisticated approach.
Achieving the control, visibility, and efficiency that fund CFOs and compliance teams need to thrive often comes down to managing complexity and capitalizing on operational advantages. For instance, larger funds benefit from economies of scale: The median fund over $100 million spends just 1% of its capital on operating expenses, while smaller funds spend 3.4%. An integrated PE software platform provides the necessary framework to realize these efficiencies, giving you the tools to manage your fund with the sophistication of a market leader.
Enter Carta: By connecting the general ledger, portfolio valuations, investor communications, and tax reporting supported by Carta Equity Advisory into a single source of truth, you can eliminate manual errors, reduce risk, and gain real-time insight into your operations. This transforms compliance from a reactive, defensive function into a strategic enabler of growth.
Request a demo to see how an integrated platform can help your firm build an institutional-grade compliance function.
Frequently asked questions about private equity compliance
How can our firm proactively identify fee and expense allocation and distribution waterfalls discrepancies?
The most effective way is to use an event-based accounting system where every transaction is tied directly to the fund's governing documents. This ensures all calculations are automated and accurate from the start, preventing misallocations before they happen.
What are the consequences of poor record-keeping during an SEC examination?
Inadequate documentation can lead to formal deficiencies, fines, and enforcement actions. The financial consequences of non-compliance are significant, as reflected in the high costs of maintaining proper legal and tax records. For the median venture fund between $1 million and $10 million, legal and tax fees alone account for a combined 20.6% of total fund operating expenses over the fund’s first five years. Errors or gaps in your records can easily inflate these costs, drain resources, and attract regulatory scrutiny.
What are the key elements of a strong culture of compliance?
A strong compliance culture starts with a clear tone from the top from the GPs and includes regular employee training and education programs from compliance professionals. It is best enabled by technology that embeds compliance checks and automated workflows into the firm's daily operations.
How should our firm document expense allocations to withstand SEC scrutiny?
The best defense is a clear, consistent, and contemporaneous record of all expenses. This is best achieved in an event-based accounting system where every expense is a transaction linked to documentation and allocated according to the fund's limited partnership agreement (LPA) and distribution waterfalls.
DISCLOSURE: This communication is on behalf of eShares, Inc. dba Carta, Inc. ("Carta"). This communication is for informational purposes only, and contains general information only. Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. © 2026 Carta. All rights reserved. Reproduction prohibited.
