Private equity compliance: A framework for fund growth

Author: The Carta Team
Read time: 11 minutes
Published date: February 26, 2026

Learn how to build a strategic private equity compliance program that satisfies regulators, builds investor trust, and supports firm growth.

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. 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.

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

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. 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

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.

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.

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. 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.

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.

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 creates opportunities for error and inconsistency.

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.

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 you need to manage your fund with the sophistication of a market leader.

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.