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Managers will have to open data rooms, disclose all fee breaks to all LPs

NAREIM Legal, Compliance & Risk meeting key takeaways

Nov 8, 2023

Managers may have to open their data rooms to every investor – and reveal every fee break given to any LP – if the SEC’s private funds rules goes into effect, members attending NAREIM’s Legal, Compliance & Risk meeting heard this week.

Under the SEC’s preferential treatment rules, fee breaks and LP incentives would have to be disclosed to new and existing investors, something that could materially impact how managers incentivize investors to be part of a first close. 

The fear is that the rules - which are currently being challenged in court by six private equity associations - could result in investors delaying being part of a first close in order to see what breaks are provided for other LPs.

Managers could then face the potential of LPs renegotiating fees after all fee breaks have been revealed, the meeting heard. If backed by the courts, the SEC preferential treatment rule would come into effect in 10 months’ time, from Sept 14, 2024.

Members also raised concerns over the impact of the SEC’s private fund rules on quarterly statements, which would require managers to provide much more granular fund and asset-level results to be released 45-days after Q1, Q2, and Q3 close – and 90-days after Q4 and year-end.

Key takeaways from the Legal, Compliance & Risk meeting included:

Fees & expenses – there are no minimums to report on

There’s nothing the SEC will not write up. 

Members heard there is no minimum threshold for what SEC examiners would look at in terms of writing up. They will look at all expenses “to the dollar”, irrespective of whether that expense or fee was a $2,000 FedEx bill or a $20m fee. 

GPs would therefore have to take a very granular approach to reporting with a major impact on compliance, IR and accounting teams, if the private funds rules stands.

The meeting also heard about the latest SEC enforcement action surrounding off-channel communications.

Enforce penalties for text messaging

Train teams “like there’s no tomorrow” and enforce a disciplinary policy when it comes to off-channel communications, especially texting between deals teams and brokers/JV partners.

Members heard the SEC is taking a much stricter approach to communications between management firms and people involved in an asset or deal, such as partners and brokers, and investors, with enforcement action already underway against some firms and individuals.

In roundtables, members shared how they were adopting the rules for their teams:

  • Provide advance notice to employees that text messages can and will be checked

  • Adopt tech solutions that capture text messages and off-channel comms directly from an employee phone. Tools included Mobius, Global Relay and Smarsh.

  • Create more on-channel communications – eg, direct message through Teams.

  • Create a disciplinary committee and enforce penalties. Start at messaging, bring in managers, C-suite, impose financial fines and termination for the most serious offenses.

  • Shame bad behavior. Anonymize and display bad behavior and inappropriate texts/communications by displaying them to employees during training.

  • Train the next generation/junior talent very well. They text all the time.

  • Tell everyone: “Write as if you are bcc-ing the regulators every time you send something.”

  • Inbound text/off-channel communications – tell employees to push the person to email to continue the conversation if there’s no capture tool on a mobile.

Every real estate investment manager will be forced to deal with off-channel communications, the meeting heard. “Everyone should sit up and take notice about this,” members were told.

The attendee list and presentations can be accessed by emailing IvyLee Rosario at

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