Related-Party Fee Disclosure Requirements

Related-party fee disclosure requirements mean you must identify any fees, compensation, or economic benefits paid to your adviser’s affiliates or other related persons, determine whether those arrangements create material conflicts, and disclose them fully and fairly to private fund investors before they invest and as conflicts evolve (15 USC 80b-6). Build this into your conflicts inventory, offering documents, Form ADV, and a repeatable quarterly review tied to actual payments and allocations.

Key takeaways:

• Treat every affiliate payment or fee allocation decision as a conflict review event, not just a finance task (15 USC 80b-6).
• Your disclosures must explain “who gets paid, how much/how calculated, from where, and why it’s fair” in plain English (15 USC 80b-6).
• Exams continue to focus on private fund adviser conflicts, fees, and disclosures, so keep your evidence package exam-ready (2025-exam-priorities).

A private fund adviser can violate fiduciary obligations without lying or stealing. The common failure mode is quieter: an affiliate gets paid, an expense is allocated to a fund, or a preferred investor receives a fee break, and the disclosure is incomplete, stale, or impossible for an investor to understand. Under the antifraud provisions of the Investment Advisers Act, advisers must not engage in practices that operate as a fraud or deceit, and private fund advisers must disclose all material conflicts of interest, including related-party transactions, fee allocations, and preferential investor terms (15 USC 80b-6).

Operationally, this requirement lives at the intersection of legal, finance, investor relations, and deal teams. If those teams do not share a single inventory of related parties and a single “source of truth” for fees and expenses, your disclosures will drift away from reality. SEC exam focus reinforces the point: private fund advisers remain an examination priority with attention on conflicts, fees, and disclosures (2025-exam-priorities).

This page gives requirement-level implementation guidance you can put into motion quickly: scoping, workflow triggers, disclosure content standards, approvals, and the evidence you should retain so you can answer exam questions without re-creating history.

What the requirement means (plain English)

You must provide investors with full and fair disclosure of material conflicts created by related-party fee arrangements and transactions. In practice, that means:

• Identify when your adviser, its affiliates, or other related persons receive compensation or other economic benefit connected to the fund.
• Explain those arrangements clearly enough that an investor can understand the conflict and make an informed decision.
• Keep disclosures current when arrangements change, new affiliates appear, or allocations shift (15 USC 80b-6).

This is broader than a single line item called “affiliate fees.” It includes any situation where the adviser’s incentives may diverge from investors because an affiliate is paid, an allocation methodology can be tuned, or certain investors receive different economic terms (15 USC 80b-6).

Regulatory text

Governing standard (antifraud/fiduciary-duty framing). The Advisers Act prohibits an investment adviser from employing “any device, scheme, or artifice to defraud” and from engaging in practices that “operate[] as a fraud or deceit” on clients or prospective clients (15 USC 80b-6). For private fund advisers, this has been applied to require disclosure of all material conflicts of interest, including related-party transactions, fee allocations, and preferential investor terms (15 USC 80b-6).

Operator translation: what you must do.

• Treat related-party fees and allocations as conflicts requiring disclosure, not only accounting entries (15 USC 80b-6).
• Draft disclosures that cover: the related party, the service/fee, how the fee is calculated, who pays it (fund/portfolio company/adviser), and how you manage the conflict (15 USC 80b-6).
• Ensure your Form ADV Part 2A and private fund disclosures match actual practices and governing documents (15 USC 80b-6).

Who it applies to (entity and operational context)

Entity scope

• Registered investment advisers that advise private funds, including hedge funds and private equity funds (15 USC 80b-6).
• Functionally, the requirement also touches controlled affiliates and related persons involved in charging fees or receiving compensation connected to the fund (15 USC 80b-6).

Operational scope (where issues arise)

• Fee streams: management fees, performance fees, monitoring/consulting fees, servicing fees, deal fees, administrative fees, affiliate reimbursement, and any other compensation streams paid to related persons (15 USC 80b-6).
• Expense allocation: how broken-deal expenses, travel, consultants, compliance costs, operating partner costs, and shared resources are allocated between adviser, funds, co-invest vehicles, and portfolio companies (15 USC 80b-6).
• Preferential terms: reduced fees, rebates, liquidity rights, or special expense terms granted in side letters that could be material to other investors (15 USC 80b-6).

What you actually need to do (step-by-step)

1) Define “related party” for your program and lock the list

Create a written definition aligned to your adviser structure and conflict framework. At minimum, include:

• The adviser entity, control persons, and affiliates that can receive compensation tied to fund activity.
• Any special purpose or service entities (administrators, operating partners, in-house consulting groups) that may be affiliated.

Artifact: Related-party register with ownership/control notes, maintained by Compliance with Legal sign-off.

2) Build a complete related-party fee inventory (not just what’s in the LPA)

Create an inventory that ties every related-party benefit to:

• Payor (fund, portfolio company, adviser, or other)
• Recipient (affiliate/related person)
• Service (what is provided)
• Calculation (rate, formula, caps, offsets, examples)
• Approval basis (LPA/PPM section, side letter, board/LPAC consent, internal approval)
• Disclosure locations (PPM, LPA, Form ADV Part 2A, investor letters)

This inventory should reconcile to finance data (general ledger, capital account statements, portfolio company fee schedules) so you can prove completeness.

Tip: Start with accounts payable/payments to affiliates, then work backwards into disclosures. Most misses are found in payment data, not legal docs.

3) Map each fee/benefit to a disclosure standard

Set a minimum disclosure content standard that answers:

• Who is paid (name of affiliate/relationship).
• What they are paid for (service description).
• How the amount is determined (methodology plus an example where feasible).
• Who bears the cost (fund vs portfolio company) and any offsets/rebates.
• Why it is a conflict and how you address it (oversight, allocation policy, approvals) (15 USC 80b-6).

Artifact: Disclosure drafting guide (“fee disclosure playbook”) with required fields and examples.

4) Update investor-facing disclosures and Form ADV to match reality

Bring the inventory into alignment across:

• PPM and LPA: economics, allocation rules, affiliate compensation permissions, offset mechanics.
• Side letters: preferential fee terms, rebates, special expense treatments.
• Form ADV Part 2A: conflicts disclosure consistent with actual arrangements (15 USC 80b-6).

Do a line-by-line consistency check: if a fee exists in payments but not in the PPM/LPA/ADV narrative, treat it as a red flag until resolved.

5) Implement a repeatable quarterly conflict review tied to triggers

SEC exam priorities flag ongoing focus on private fund adviser conflicts, fees, and disclosures (2025-exam-priorities). Treat this as an operational cadence:

Quarterly review inputs

• Payments to affiliates and related persons (AP extracts, portfolio company fee schedules).
• New service arrangements (consulting, operating partners, internal shared services).
• New side letters or amendments.
• Allocation exceptions or overrides.

Trigger events (don’t wait for quarter-end)

• New affiliate formation/acquisition.
• New portfolio company agreement with monitoring/consulting fee arrangements.
• Fund launch, co-invest vehicle creation, or changes to allocation methodology.
• Investor requests for fee breaks or special expense treatment.

Artifact: Quarterly conflicts committee minutes and an action log (disclosure updates, approvals, remediation).

6) Put approvals and oversight in writing

You need a clearly assigned owner and an escalation path:

• Compliance owns the inventory, review cadence, and disclosure consistency.
• Finance owns fee calculations and allocation execution, with documented methodology.
• Legal/IR own offering document updates and investor communications.

For higher-risk items (novel affiliate fee, large allocation exception), require a documented review and approval by senior management and, where applicable under your governing documents, LPAC or similar body. Keep the logic consistent with fiduciary-duty expectations (15 USC 80b-6).

Required evidence and artifacts to retain (exam-ready)

Maintain an evidence package that maps directly to typical exam document requests for private fund advisers (2025-exam-priorities):

• Related-party register (current and historical versions).
• Related-party fee and expense inventory (with cross-references to disclosures).
• Fee calculation methodologies with worked examples for management/performance fees and any affiliate fee offsets.
• Expense allocation policy and procedures; exception logs with approvals.
• PPMs, LPAs, and amendments (final executed copies).
• Form ADV Part 2A and any private fund supplements (current and prior filings).
• Side letters and preferential treatment schedules.
• Quarterly conflicts review agendas, minutes, and action tracking.
• Investor communications related to fees/conflicts (notices, letters, email templates).
• Testing results: periodic sample testing that billed amounts match disclosed methodologies.

Common exam/audit questions and hangups

Examiners and auditors tend to push on “prove it” topics tied to fees and conflicts (2025-exam-priorities). Expect questions like:

• Show all payments made to affiliates/related persons and where each is disclosed.
• Provide the fee and expense allocation policy, plus evidence it was followed.
• Explain any allocation overrides or manual adjustments and who approved them.
• Provide side letters; identify preferential economic terms and how they were disclosed to other investors (as required/appropriate under your documents) (15 USC 80b-6).
• Reconcile disclosures to actual calculations: “Walk me through this fee line item from governing document to invoice to ledger to investor reporting.”

Hangups usually arise when disclosures are technically present but not specific (e.g., “affiliates may receive compensation”) without methodology or examples.

Frequent implementation mistakes (and how to avoid them)

1. Relying on generic disclosure language.
   Fix: require fee-specific disclosure fields (recipient, payor, calculation, offsets, conflict management) (15 USC 80b-6).

2. No single source of truth.
   Fix: one inventory owned by Compliance, reconciled to finance payments at least quarterly.

3. Ignoring portfolio company-level fees paid to affiliates.
   Fix: collect portfolio company agreements and fee schedules, then tie them to disclosures and offsets.

4. Side letters managed as “IR-only.”
   Fix: Compliance reviews side letters for preferential fee/expense terms and updates the preferential treatment schedule.

5. Weak evidence of review.
   Fix: keep minutes, sign-offs, and change logs. If it’s not written down, it didn’t happen in an exam.

Enforcement context and risk implications

The statutory hook is antifraud: failures in conflict and fee disclosure can be treated as conduct that operates as a fraud or deceit on investors (15 USC 80b-6). Independently of any single case, SEC exams continue to state focus on private fund advisers, conflicts, fees, and disclosures (2025-exam-priorities). Your risk is not limited to penalties; it includes rescission/reimbursement demands, investor disputes, reputational damage, and a costly remediation cycle (15 USC 80b-6).

Practical 30/60/90-day execution plan

Day 0–30 (stabilize and scope)

• Name an accountable owner (CCO or delegate) and form a small working group across Compliance, Finance, Legal, and IR.
• Create the related-party register and initial fee/benefit inventory using payments data and known affiliate arrangements.
• Freeze a disclosure content standard and a disclosure mapping template (inventory line item → PPM/LPA/ADV/side letter references).

Day 31–60 (align disclosures to reality)

• Perform a gap analysis: every inventory item must map to disclosure language and governing authority.
• Remediate the top gaps: revise disclosures for new fundraising, prepare investor notices where required/appropriate under your documents, and update Form ADV narratives as needed (15 USC 80b-6).
• Document fee calculation methodologies and expense allocation rules with examples, then align finance procedures.

Day 61–90 (institutionalize and test)

• Launch the quarterly conflict review process and define trigger events.
• Implement sample testing: pick a set of affiliate payments and trace to disclosure and calculation support.
• Build an exam-ready data room structure around the “typically requested items” list for private fund exams (2025-exam-priorities).

Where Daydream fits naturally If you are managing multiple funds, affiliates, and side letters, the hard part is keeping the inventory, disclosures, approvals, and evidence connected over time. Daydream can act as the system of record for your related-party fee inventory, map items to required disclosure locations, and maintain a clean evidence trail for exams.

Frequently Asked Questions

What counts as a “related-party fee” for disclosure purposes?

Treat any compensation or economic benefit paid to the adviser or a related person that is connected to the fund, its investors, or portfolio companies as in-scope for review and potential disclosure (15 USC 80b-6). If it creates an incentive that could diverge from investor interests, assume it is a conflict to evaluate.

Do I need to disclose fee calculation methodology, or is naming the fee enough?

Naming a fee is rarely enough. Disclosures should explain how the fee is calculated and who bears it so investors can understand the economic impact and the conflict (15 USC 80b-6).

Where should these disclosures live: PPM, LPA, or Form ADV?

Use all relevant channels and keep them consistent. PPM/LPA typically carry the detailed economic terms; Form ADV Part 2A must describe conflicts accurately and consistently with actual practices (15 USC 80b-6).

How do we handle preferential fee terms granted in side letters?

Maintain a side letter log that identifies preferential economic terms and routes them through Compliance for conflict analysis and any required disclosure updates (15 USC 80b-6). Make sure Finance can operationalize the term without ad hoc workarounds.

What evidence should I expect an SEC exam team to request?

Common requests include PPMs/LPAs, Form ADV Part 2A, related-party transaction documentation, fee calculation and expense allocation policies, side letters, and conflicts policies (2025-exam-priorities). Build a package that ties each affiliate payment to disclosure and support.

What if a related-party arrangement changes mid-year?

Treat changes as a trigger event: update the inventory immediately, assess whether disclosures need updating, and document approvals and investor communications consistent with fiduciary-duty expectations (15 USC 80b-6).