Financial professionals, especially those at private equity firms and hedge funds: heads up on new regulations, advises Jeffrey Stomski.
Stomski, a partner in the financial services group at accounting firm EisnerAmper, spoke with StrategicCFO360 about what’s already happened, what’s likely to happen next—and how to make sure you can handle the changes.
How do the amendments to Form PF change the role of the CFO office at private equity and hedge fund firms?
In May 2023, the SEC announced amendments to Form PF, the confidential reporting form that certain SEC-registered private fund advisers, like hedge fund and private equity managers, are required to file.
Many Form PF amendments require specific classification of transactions and complex calculations across multiple data elements. This added responsibility will be given to the office of the CFO, which is an integral part of every organization, acting as the gatekeeper to all financial information.
The office of the CFO will need to leverage and tailor its reporting platform to meet these new regulatory requirements. This will add another layer and component to their job descriptions during a time when workers are stretched, and private equity and hedge funds are trying to attract and retain talent.
What other regulations should CFOs be prepared for over the next 12 months?
CFOs should pay close attention to several regulatory events in the coming months:
Private Fund Manager Rules. CFOs should again be on the lookout for additional or enhanced regulations that increase demand for enhanced data. As we have seen with the Form PF amendments, new regulation puts additional demand on already constrained resources. Many private fund managers we work with are beginning to identify resources, either internally or through their outsourced service relationships, to comply with the proposed regulations should they be adopted.
Cybersecurity. The SEC has been clear that private funds are at increased risk to be targeted by bad actors to access sensitive financial information for their personal financial gain. As a response to the proposed SEC rule change, CFOs are taking the opportunity to assess the current health of their IT infrastructure and related policies. Our cybersecurity team, which is part of EisnerAmper’s outsourced IT services group, has helped clients identify and address cybersecurity risks as well as review and assess the design and effectiveness of their cybersecurity policies and procedures.
ESG. Data storage and enhancement will become increasingly important as ESG-specific requirements evolve. Again, CFOs must evaluate whether their current data platforms and human capital are adequate to address the robust proposed reporting requirements.
Marketing Rule. The marketing rule changes, as the name implies, will impact materials used by private fund managers to go-to-market. More specifically, return calculations, often provided by the office of the CFO will be subject to specific requirements. We are working with our current clients to ensure return calculations are in compliance with the proposed regulations, so if any changes are necessary marketing materials can be updated in real time.
Describe the role technology is playing in firms’ decisions to outsource.
Many firms are looking to implement technology to leverage resources. Like every business, fund managers are faced with a decision of whether to build or buy technology to meet their operational needs. Evaluating current resources to determine whether there is sufficient in-house knowledge and expertise to accomplish the desired outcome is an important first step in the process.
When sufficient “local knowledge” is not available or current resources are constrained, firms look to outsourced service providers with existing technology platforms for help.
The ultimate goal in the process is to identify an outsourced service provider with the technology that can be seamlessly integrated into the firms’ operations. Bill Gates said it best, “The advance of technology is based on making it fit in so that you don’t really even notice it, so it’s part of everyday life.”
What are the cost savings and financial benefits of outsourcing?
Not only does outsourcing allow private equity and hedge funds to focus on their core business, but it is also cost effective.
Cost of services are typically lower than the full-time employee equivalent and require no employee benefits, such as insurance.
As well, additional resources are obtained through an outsourcing relationship, such as leveraging tax or technical expertise contained outside of the firm’s primary engagement team and access to the firm’s technology platform and related tools.
Finally, industry knowledge and experience that may have otherwise been unavailable through a single employee or require higher compensation than a particular firm is willing or able to pay had that individual been hired as a full-time employee [can be accessed].