News & Analysis

Firm size not best mark of compliance costs, study finds

Fresh research reveals that Dodd-Frank compliance costs are not determined by AUM, but by the number of funds a GP manages.

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The private funds industry has long been claiming that regulations like the Dodd-Frank Act create a bigger compliance burden for smaller firms than they do for larger firms. However, a new study reveals that it is not necessarily a firm’s amount of assets under management (AUM) that determines the extent of its compliance costs, but rather the number of funds it manages.

The study, entitled “What Drives Dodd-Frank Act Compliance Cost for Private Funds?”, was conducted by Wulf Kaal, an associate professor at the University of St. Thomas School of Law.

While several factors can increase the complexity of reporting on Form PF – including the number of funds managed, AUM and strategies employed – Kaal’s findings indicate that the number of funds managed by a private fund adviser is associated with Dodd-Frank compliance costs, while adviser AUM and the use of single versus multiple investment strategies are not.

The study suggests that smaller private fund advisers may be able to limit compliance costs by managing a comparatively smaller number of private funds, but that this could, “impact the investment strategy of smaller fund advisers and limit their ability to raise funds, rendering them overall less competitive,” noted Kaal.

The findings support protests from many in the industry that compliance costs create barriers to entry for smaller firms, potentially forcing them out of the market or forcing them to consolidate with other advisers. Indeed, the Association for Corporate Growth’s Private Equity Regulatory Taskforce is currently making this case to the US Securities and Exchange Commission. However, it is unclear if they are arguing for “smaller managers” based on AUM or number of funds.

The study collected data from 1,264 private fund advisers, and also found that the most common estimated amount spent per year on Dodd-Frank compliance was $50,000 to $100,000. The most common response for amount of time per year spent on Dodd-Frank compliance was 100 to 250 hours.