Reading Your Fund Documents as a Compliance Officer

There is a sequence that governs every governance question at a boutique PE manager, and it is not the sequence the deal team uses. The deal team reads the LPA looking for the answer it wants. The compliance officer reads it to find the gate it creates, then layers the regulatory obligation on top, then asks what artefact must exist before the transaction closes.

The sequence is contract first, regulation second, evidence third. Gate 1 is the LPA, the side letters, and the DDQ: what does the document say, what trigger applies, what notice is required, and is there a reserved matter that needs LP or LPAC consent? Gate 2 is the regulatory overlay: SYSC 10 conflicts rules, AIFMD Art 14, FUND 3.9 valuation duties, SUP 15 notification requirements, SMCR filings. Gate 2 sits on top of Gate 1 and supplements it. Clearing Gate 1 does not clear Gate 2. Gate 3 is the evidence: a named artefact, dated before you act, that shows both gates were cleared.

Two further points run through every section. First, the LPA must be read before the regulation. If the LPA reserves a matter to the LPAC, that consent is a contractual precondition. Skipping it is a breach regardless of what SYSC permits. Second, documented is not evidenced. A control that lives in a policy but cannot be shown in a dated minute, a register entry, a signed consent, or a timestamped notice is not a control for supervisory purposes. The FCA's compulsory conflicts questionnaire sent to PE managers in November 2025, with a two January 2026 response deadline, demanded exactly these artefacts. That questionnaire is, in effect, the FCA's pre-published show-me list.

A practical discipline the guide assumes throughout: keep two ledgers running simultaneously for any event that affects the firm. Ledger A records the fund and contract consequence: LPA triggers, LP notices, LPAC consents, side-letter obligations. Ledger B records the regulatory and firm consequence: SYSC 4 and SMCR filings, SUP 15 notifications, FCA material-change filings, conflicts-register entries. A key-person departure trips both ledgers, and the two clocks start on different days. Missing one ledger is the most common boutique compliance failure.

The first question on any significant fund transaction is contractual: does the LPA require LPAC consent? The answer is in the reserved-matters clause. That clause defines the consent gate precisely: what transactions require prior written approval, what threshold triggers it, and whether consent is individual or collective. Regulation supplements the contract but does not replace it. If the LPA requires LPAC consent for a cross-fund transaction, that consent is a precondition to closing, independent of whether SYSC 10 also requires disclosure.

SYSC 10.1.3R requires the firm to identify, prevent, or manage conflicts across five minimum situations. The limb that covers cross-fund transactions is the incentive to favour one client over another. SYSC 10.1.6R requires the firm to maintain and regularly update a conflicts register and provide a written report to senior management at least annually. SYSC 10.1.7R requires arrangements to prevent conflicts from damaging clients and an annual policy review. SYSC 10.1.8R provides that disclosure is a measure of last resort and does not discharge the firm's obligation to maintain arrangements. AIFMD Art 14(2) reinforces this: disclose only where arrangements cannot ensure with reasonable confidence that damage is prevented.

Post-Braganza v BP Shipping [2015] UKSC 17, contractual discretion must be exercised rationally and in good faith. The fact that the LPA grants the GP sole discretion on a matter does not answer the conflicts question. It answers the contractual question. The conflicts question requires a separate analysis under SYSC 10.1.3R, with the specific deal-level conflict logged on the register before any action is taken.

Where the LPA reserves a matter to the LPAC, the procedure requires prior written consent obtained before terms are disclosed to the wider LP base. The materials must be circulated in advance with adequate time for consideration. Each LPAC member's response must be a written consent, not a phone confirmation. LPAC members' own conflicts must be declared at the start of each meeting and recusals documented. A quorum of 50% and one vote per institution is the ILPA standard; departures from it weaken the clearance.

Where a cross-fund or continuation transaction involves the GP setting the price, an independent fairness opinion or third-party valuer is required under FCA good practice as articulated in the Private Market Valuation Practices review of March 2025.

The evidence file needs: a decision memo citing the specific LPA clause and the SYSC 10.1.3R conflicts screen, dated before the transaction; a conflicts-register entry timestamped before completion; signed LPAC minutes recording the quorum, the vote count, the vote date relative to signing, and the materials pack sent in advance; declarations-of-interest minutes and recusal records; the fairness opinion for material transfers; and the annual conflicts board report.

Key-person governance requires running two ledgers simultaneously from the moment a founding partner changes their time commitment, regardless of whether the formal contractual trigger has fired.

Ledger A runs against the LPA. The key-person clause defines the time-and-attention standard, which is either a qualitative threshold (substantially all business time and attention) or a quantitative one (at least 80% of working time). It specifies the Key Person Event definition, typically requiring the failure to persist for a defined period of 180 consecutive days. It specifies the suspension mechanic, which in approximately 88% of funds is automatic on the Key Person Event: new investments halt, follow-ons and pre-committed transactions continue. It specifies the cure window, typically 90 to 180 days, and the reinstatement conditions, which usually require LPAC or LP-supermajority consent. If unresolved at the end of the maximum cure window, approximately 92% of funds auto-terminate the investment period.

Ledger B runs against the regulatory obligations, on a separate clock that can run ahead of the contractual trigger. SYSC 4.2 requires at least two persons to effectively direct the business. SYSC 4.3 requires senior personnel to commit sufficient time. SYSC 4.1.2D R requires the AIFM to use adequate and appropriate human and technical resources at all times. This is the operative rule: SYSC 4, not FUND 3.7, which covers risk management. SUP 15.3.1R requires immediate notification to the FCA of any matter that could affect threshold conditions. SUP 15 Annex 6C requires a material-change notification filed at least one month before a change to who effectively directs the AIFM takes effect.

The regulatory clock can therefore require a SUP 15 Annex 6C filing before the contractual LPA suspension has fired. A founder reducing to 60% time in month one may not yet have triggered the LPA key-person clause. But the Annex 6C filing may already be due if the change affects who effectively directs the AIFM.

On SMCR: if the founder retains the SMF function part-time, the filing is a revised Statement of Responsibilities plus Form D under SUP 10C.14.15R, as soon as reasonably practicable. If the founder ceases the SMF function, the filing is Form C within ten business days under SUP 10C.14.5R, or a qualified Form C within one business day where a fitness or propriety concern is in play. Any Prescribed Responsibility previously held by the departing SMF must be explicitly reallocated to another approved SMF with an updated Statement of Responsibilities. An informally absorbed Prescribed Responsibility is a SMCR breach.

The evidence file needs: the executed key-person clause with the named-persons schedule, version-controlled against side letters; a dated time-and-attention assessment memo prepared before the trigger fires; the trigger-clock analysis note; the suspension determination memo and LP notice, with a drawdown log showing new investments stopped; the LPAC consent resolution at the specified threshold within the cure window; board and IC minutes evidencing two directing minds after the change; the SUP 15 Annex 6C filing receipt; and the updated Statements of Responsibilities for any re-homed Prescribed Responsibility.

Excuse and exclusion rights are contractual, not regulatory, in origin. The right to be excused from a deal, or to be excluded from a category of investment, lives in the side letter or the LPA. The compliance obligation is to implement the right correctly, not to create it.

An excuse right is a deal-by-deal opt-out for a specific legal, regulatory, tax, or investment-policy conflict. The trigger conditions vary: some require the LP to certify its legal constraint; others require an opinion of counsel; others permit a policy conflict without further evidence. The notice must be given before the investment is made, not after. A post-investment notice falls outside the mechanism and converts a protected carve-out into a discretionary accommodation, which is itself a conflict requiring separate management.

An exclusion right is a standing carve-out from a category of investment. It imposes a screening duty on every deal: for each new investment, compliance must check whether any LP holds an exclusion right and whether the investment falls within it. Missing that screen is a breach of the contractual duty, even if the LP never asks.

On ERISA: the plan-asset rules under 29 CFR 2510.3-101 require the benefit-plan investor percentage to be recomputed immediately after each acquisition of fund interests. US state and local government pension plans, and foreign plans, do not count toward the 25% threshold under the post-2006 PPA amendments. US private corporate pensions do count. An IRA-backed fund-of-funds counts on a pro-rata basis. Excusing a non-benefit-plan LP can raise the BPI percentage for remaining LPs. The computation must occur on every excuse, not just at first close.

On sanctions: OFAC's 50% Rule aggregates interests of different blocked persons, potentially blocking a target where no single designated holder meets the threshold. The UK OFSI test applies a single-designated-person standard above 50%, generally without aggregation, plus a separate control test. The two tests diverge, and both must be run on any US-nexus investment. Non-production of documents to an OFSI Request for Information is itself penalisable.

The evidence file needs: the excuse-clause reference, the LP written certification, and an opinion of counsel where required; a dated notice log proving the notice was received before the investment closed; the recalculated BPI worksheet per equity class; an annual VCOC minute and management-rights register showing rights were exercised; dual-ruler sanctions screening records retained for regulatory retrieval; the recalculated allocation and capital-call table with the over-call cap check; the conflicts-register entry; and the AIFMD Art 23 preferential-treatment disclosure confirmation.

Valuation governance in a PE fund runs across two tracks simultaneously. The contractual track is the LPA valuation clause, which specifies who values, how, on what methodology, and at what frequency. The regulatory track is FUND 3.9, which implements AIFMD Art 19 and requires the valuation to be carried out independently from portfolio management, either by an external valuer or by a functionally independent internal valuation function, using consistent and appropriate methodology.

The first question is always: what does the LPA say? The methodology required by the LPA governs as a contractual obligation. Regulatory requirements supplement it. If the LPA requires IPEV Valuation Guidelines, FUND 3.9 does not override that requirement. If the LPA requires quarterly valuations, the regulator does not permit annual valuations by default.

The independence requirement is the point of most practical difficulty for boutiques. At a small manager where the same partner makes investment decisions and oversees valuations, functional independence within the existing team requires at minimum a documented valuation committee that operates on its own mandate, with recorded deliberations, challenge questions, and sign-off independent of the deal team's commercial interest in a particular mark.

The FCA's Private Market Valuation Practices multi-firm review of March 2025 identified four recurring weaknesses: inconsistent application of valuation methodology across the portfolio; absence of documented challenge to management assumptions in valuation models; insufficient independence between the portfolio team proposing a mark and the function approving it; and unrealised marks presented in marketing materials without a dated valuation committee minute behind each figure.

Unrealised performance figures in any marketing material must be supported by a dated independent valuation committee minute behind each mark. The minute must record the methodology applied, the inputs used, the challenge questions asked, and the final conclusion. A mark that is described as based on the firm's own methodology in the marketing material, without that supporting minute, is a performance-presentation breach as well as a valuation governance failure.

The evidence file needs: the LPA valuation clause cited in the annual valuation policy; dated valuation committee minutes for each period, recording methodology, inputs, challenge discussion, and sign-off; the independence arrangement documented (external valuer engagement letter, or the internal segregation memo); a version-controlled valuation model for each portfolio company; and any departures from the stated methodology recorded and explained at the time of departure.

Preferential treatment is not prohibited. It requires disclosure. AIFMD Art 23(1)(i) requires the AIFM to disclose, in the fund offering document and on an ongoing basis, any preferential treatment given or to be given to any investor, the type of investor receiving it, and the material implications for other investors. The FCA's implementation in FUND 3.2 applies the same obligation.

The most common forms of preferential treatment are: reduced management fees, reduced carried interest, enhanced co-investment rights, enhanced information rights (more frequent or more detailed reporting than other LPs receive), enhanced excuse rights, and enhanced liquidity rights. Each requires disclosure before the LP invests, in the offering materials, not in a separate letter that may not be read.

Most-favoured-nation clauses create disclosure obligations of their own. An MFN clause entitles a LP to elect the benefit of terms given to any other LP. The scope of the MFN and the carve-outs from it must be disclosed to every LP receiving the clause. Where an LP exercises an MFN election, the firm must confirm whether the election is valid (some terms are explicitly carved out of MFN, including terms required for regulatory or tax reasons) and, if valid, implement the elected terms for all subsequent dealings.

The preferential-treatment disclosure obligation under Art 23 is not discharged by including a generic statement that side letters may grant preferential terms. The disclosure must identify the type of investor receiving preferential treatment and describe the material implications for other investors in terms of liquidity, information, and economics. A disclosure that says only that side letters exist without describing their content does not satisfy the obligation.

The annual report obligation under AIFMD Art 22 requires the AIFM to disclose, per fund, the total amount of remuneration paid to staff (divided between senior management and other staff), and the carried interest paid. This is distinct from the Art 23 preferential-treatment disclosure and runs on a separate annual timeline.

The evidence file needs: the offering memorandum disclosure confirming each form of preferential treatment and the investor type; the side-letter schedule naming each LP with a summary of preferential terms; each individual side letter; the MFN election log; the Art 23 ongoing-disclosure record; and the annual Art 22 remuneration disclosure.

The FCA's message across all supervisory communications from 2025 and 2026 is consistent: senior accountability, board-visible MI, and an audit trail that a third party can test independently. A control that lives in a policy but cannot be produced as a dated artefact is, for supervisory purposes, not a control.

The distinction runs through every regime. For LPAC reserved matters: documented means the policy says LPAC consent is required. Evidenced means a signed LPAC minute recording the quorum, the vote, and the date relative to signing, with the circulated materials pack attached. For key-person events: documented means the policy describes the suspension mechanic. Evidenced means the suspension determination memo, the dated LP notice, and the drawdown log showing new investments stopped on the suspension date. For valuation: documented means the policy says the valuation committee approves all marks. Evidenced means a dated committee minute per period, with challenge questions and sign-off recorded.

The show-me test is the practical governance tool. Before any board meeting or regulatory inspection, pull the artefact for each obligation in the relevant period. If the honest answer to any row is "we do this but it is not written down anywhere," that is the gap. The FCA's November 2025 questionnaire to PE managers was, in effect, the show-me test pre-administered. Each question corresponded to a specific artefact: the conflicts register, the escalation log, the preferential-treatment disclosure, the cross-fund transaction record. Managers who could produce those documents answered in days. Managers who could not spent months reconstructing records from email threads.

The artefact standard for a boutique is not complicated. A dated email, a meeting minute, a signed form, a register entry, a filing receipt. What makes it hard is the timing requirement. The artefact must exist before the act it is meant to evidence. A conflicts-register entry dated the day after a transaction closes cannot evidence that the conflict was managed before the transaction closed. A valuation committee minute prepared for the year-end accounts in February cannot evidence that the Q3 mark was independently reviewed in October. The practice of creating contemporaneous records at the time of each event is the only way to meet the standard.

The board of a boutique UK AIFM owns the LPA governance framework. Its job is not to make every fund-document decision. Its job is to ensure the compliance function has the tools and authority to run the three-gate sequence correctly, and to receive MI that evidences it.

Three items require board-level attention at least annually. First, the conflicts register: the board should receive the annual written report required by SYSC 10.1.6R, reviewing the conflicts recorded in the period, the management actions taken, and any gaps identified. Second, the LPAC governance review: the board should confirm that LPAC reserved matters were identified correctly, that consents were obtained before transactions closed, and that materials were circulated in advance with adequate time. Third, the valuation policy review: the board should confirm that the methodology applied in the period is consistent with the LPA, the regulatory requirements, and the policy approved in the prior year.

The twelve-month governance agenda for a firm building this from scratch runs as follows. In the first month, read the LPA, all side letters, and the current DDQ responses. Map each reserved matter to the LPAC consent threshold, each side-letter obligation to a compliance calendar item, and each DDQ commitment to an evidence requirement. In the second month, review the conflicts register against the transactions completed in the prior 12 months. For each, confirm a pre-transaction conflicts screen exists, a register entry is dated before the transaction, and any required LPAC consent is documented.

In the third month, review the valuation policy against the LPA valuation clause and FUND 3.9. Confirm the independence arrangement is documented, committee minutes exist for each period, and no marks are in current marketing materials without a dated minute behind them. In the fourth and fifth months, review the key-person clause against the current composition of the investment team. Confirm the time-and-attention assessment is current, the named-persons schedule is updated, and the Annex 6C filing position has been reviewed against the current facts.

In the sixth month, present the outcomes to the board: the conflicts register review, the LPAC consent log, the valuation committee record, and the key-person analysis. Get board sign-off on the conflicts policy and valuation policy for the coming year. From month six onward, run quarterly MI to the board on conflicts escalations, cross-fund transactions, valuation departures, and any LPAC consent matters in the pipeline. The annual cycle then re-runs from month one.