What is the compliance officers’s role in fees and expenses policies and procedures?
Compliance may not make the decision, but will be responsible for documenting the agreed-upon allocation. Compliance will be responsible for monitoring.
Some allocations can be based on the compliance manual or desktop accounting processes. The SEC wants to make sure you document any allocation. It does not have to be as formal as the compliance manual.
Think about flexibility in allocation or default rules that can be overridden to more equitably allocate the expenses properly.
Allocation of D&O insurance? Perhaps allocate to funds based on AUM. Perhaps the retainage sits with the management to take the risk. Some just split it 50/50. Some split it based on risks based on the different risk profiles with some to the management company. There is definitely a wide range of allocations. The emphasis is on consistency.
Dealing with business travel when a single trip involves multiple meeting with multiple purposes. For example, meeting with a potential LP, meeting with an investor, meeting on an investment. Equitably pro-rate the expenses. With investor meetings, it’s common to over-allocate to the current fund because that is where the investment action is occurring.
How to deal with co-investments. If you can get LPs to commit to co-invest up front, they should take the burden of the some of the broken deal expenses. If co-investors come in at the end and get solicited after the investment decision has been made, it does not seem right to allocate broken deal expenses. Of course, if the deal fell through after committing to the investment, perhaps there is an open issue. Several firms that do lots of co-investments stated that they cannot any instance of paying broken deal costs for prospective investments. However, a poll indicated that broken deal expenses are allocated to co-investors at least in some instances by 20% of the responding attendees.
Be cautious about mixing business and personal trips. Focus on the right way to allocate and not let personal expenses leak into the investor costs. A spouse on a business trip is a problem.
Annual meeting expense allocations. The SEC staff has dug into these allocations. Some split equally to the active funds. Some split based on AUM. Fund service providers or non-investors should be charged to the management company.
How to make sure fees are being properly allocated. Make sure there is process for the calculation and a procedure for approval. Generally, private funds will have the fees audited as part of the audit for compliance with the custody rule.
(This session was subject to the Chatham House Rule so I have not identified the participants and have not attributed any of the statements to anyone.)