When I talk to first-time fund managers about compliance, I often hear something like: "We are a two-person team. We do not need a compliance department." They are right, they do not need a department. But they do need a compliance program. The SEC requires it for registered investment advisers under Rule 206(4)-7 of the Advisers Act, and even exempt reporting advisers are subject to anti-fraud provisions that make a written compliance framework a practical necessity [29].
Here is what I have learned working with dozens of emerging managers: the SEC examines newly formed fund advisers more often than people expect [31]. That is not speculation. The SEC's Division of Examinations has said publicly that new registrants and new filers are priority targets. Building a proper compliance program from day one means being ready when the examiner shows up, which for a new fund can happen within the first two years.
What a compliance program actually looks like
Rule 206(4)-7 is principles-based rather than prescriptive. You need written policies and procedures reasonably designed to prevent violations of the Advisers Act, an annual review of those policies, and a designated Chief Compliance Officer [29]. The SEC does not tell you exactly what your policies must say. They tell you the areas that need to be covered and expect you to design procedures appropriate for your firm's size, strategy, and operations.
For a small emerging fund manager, the compliance manual does not need to be 200 pages. But it does need to address every area the SEC considers material, and the procedures need to be actually followed, not just written down and filed away. Examiners look for evidence that the program is real: sign-offs, completed reviews, documented decisions, and corrective actions taken when issues are identified.
The Code of Ethics
The Code of Ethics is the centerpiece of any fund compliance program. Under Rule 204A-1 of the Advisers Act, every registered investment adviser must adopt a Code of Ethics that establishes standards of conduct for all "supervised persons," which includes every employee, partner, and affiliate involved in the fund's advisory activities [29].
The Code must address:
- Personal securities trading: "Access persons" (anyone with access to non-public information about client transactions or portfolio holdings) must report their personal securities transactions and holdings periodically. The initial holdings report is due within 10 days of becoming an access person, annual holdings reports must be current within 45 days of the firm's fiscal year-end, and transaction reports are due quarterly within 30 days of the quarter-end [29].
- Pre-clearance: Many compliance programs require access persons to obtain approval before executing personal trades, particularly in securities that the fund may also be trading or considering.
- Gifts and entertainment: Policies governing the acceptance of gifts, meals, and entertainment from service providers, broker-dealers, and portfolio companies.
- Political contributions: The SEC's pay-to-play rule (Rule 206(4)-5) restricts contributions by fund managers and their employees to government officials who could influence the allocation of public pension fund capital.
- Conflicts of interest: Procedures for identifying, disclosing, and managing conflicts between the fund manager's interests and those of the fund's investors.
Every supervised person must acknowledge in writing that they have received and reviewed the Code of Ethics, and you must collect annual compliance certifications from each employee [29]. For a two-person GP team, this feels like signing a document you wrote for yourself. But the documentation matters. When the SEC examiner asks for your Code of Ethics acknowledgments, you need to produce signed copies.
The custody rule
The custody rule (Rule 206(4)-2) is probably the compliance requirement that affects day-to-day fund operations the most. It requires that all client funds and securities be maintained with a "qualified custodian," typically a bank, broker-dealer, or other financial institution meeting SEC standards [30][33].
For most emerging fund managers, complying with the custody rule means using an established prime broker or custodian bank to hold fund assets in segregated accounts. The custodian must provide account statements directly to investors at least quarterly. If the fund manager or a related person serves as the qualified custodian, additional requirements kick in: an annual surprise examination by an independent accountant registered with the PCAOB, and an internal control report (often a Type II SOC 1 audit) [30][33]. These additional requirements run $15,000-$30,000 annually, which is why most emerging managers avoid self-custody.
One thing that catches first-time managers off guard: if you have the authority to deduct management fees directly from the fund's custodial account (which most GPs do), the SEC considers that "custody." This triggers the requirement for an annual audit of the fund's financial statements by an independent accountant registered with the PCAOB, distributed to investors within 120 days of the fund's fiscal year-end. Most venture funds need this audit anyway for LP reporting purposes, so the practical impact is more about timing and distribution requirements than additional cost.
The marketing rule
The marketing rule (Rule 206(4)-1) governs how fund managers present performance information to prospective investors [46]. Any advertisement containing performance data must include both gross and net performance figures [46]. You cannot show a prospective LP your gross returns without also showing what those returns look like after fees and expenses.
Private fund advisers get somewhat more flexibility than advisers managing separately managed accounts. But you still must use consistent methodologies, time periods, and calculation methods. Cherry-picking favorable time periods, showing only your best deals, or presenting hypothetical performance without proper disclosures are all violations that the SEC has specifically targeted in enforcement actions.
In practice, your pitch deck and any written performance materials need compliance review before distribution. If you are presenting a track record from prior fund experience, angel investing, or personal investments, you need to clearly disclose that the track record is not from the fund itself and that past performance does not guarantee future results. The marketing rule has specific requirements for the presentation of predecessor track records.
Annual compliance review
Registered investment advisers must conduct an annual review of their compliance program's adequacy and effectiveness [29]. This is not a rubber stamp. The review should evaluate whether policies are being followed, whether any violations occurred during the year, whether any changes in the business or regulatory environment require policy updates, and whether the compliance program's resources are adequate.
For a small firm, the annual review can be conducted by the CCO or by an outside compliance consultant. Many emerging managers hire a compliance consultant to conduct the annual review, which provides both expertise and independence. The review should produce a written report documenting findings and any recommended changes. Keep this report. The SEC will ask for it during an examination.
Chief Compliance Officer
The SEC requires that every registered investment adviser designate a Chief Compliance Officer [29]. For a two-person GP team, this is typically one of the principals. The CCO does not need to be a full-time compliance professional, but they need to have sufficient understanding of the regulatory requirements and the authority to implement compliance procedures.
Many emerging managers supplement an internal CCO designation with an outsourced compliance consultant who provides day-to-day guidance, maintains the compliance manual, handles regulatory filings, and conducts the annual review. This hybrid model (an internal CCO with external compliance support) is the most common approach for funds that are too small to justify a dedicated compliance hire but need real compliance expertise.
SEC examination priorities
Keeping track of the SEC's annual examination priorities is basic risk management. Recent priorities have focused on private fund adviser conflicts of interest, fee and expense practices, valuation methodologies, custody and safeguarding of client assets, and the adequacy of compliance programs and disclosures [31][44]. The SEC has also flagged marketing rule compliance as an area of increasing focus, particularly around performance advertising and the use of testimonials and endorsements.
The bottom line for emerging managers: the SEC is paying attention to funds your size. The days when a small fund could fly under the radar are over. Build the compliance infrastructure now, and you will be ready when the examination letter arrives.
How Infra One helps with compliance operations
We handle the operational side of compliance for our fund manager clients as part of our fund administration services. That includes investor reporting and statement distribution (which supports custody rule compliance), expense tracking and fee calculations (which supports fee transparency requirements), and maintaining the fund records that examiners request during an SEC examination. We also coordinate with your compliance consultant or outside counsel on regulatory filings and annual reviews.
If you are building a compliance program for your first fund and want to make sure the operational infrastructure supports it, book a call with our team.
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