On February 9^th, 2022, the SEC proposed new rules that, if adopted, would greatly shift the regulatory requirements for private fund advisers. The proposed rules are designed to protect private fund investors by increasing transparency, competition, and efficiency and support the trend of the SEC’s growing focus on private funds and advisers. Certain parts of the Proposed Rules are applicable to all private fund advisers including registered investment advisers, exempt reporting advisers, state-registered advisers, and other private fund advisers not subject to reporting or registration requirements.

Key elements are summarized below.

Quarterly Statement Rule 

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  • Requirement for SEC-registered investment advisers to private funds to prepare quarterly statements including information about:
    
    
    
    • Fees
    
    
    • Expenses
    
    
    • Payments to related persons
    
    
    • Performance
    
    
    
    
  
  
  • Requirement for the standardized disclosure of:
    
    
    
    • Compensation paid to the adviser and its related persons
    
    
    • Fund expenses
    
    
    • Fund holdings that pay compensation to the adviser and its related persons
    
    
    • The cost of investing in the private fund
    
    
    • Performance
    
    
    
    
  
  
  • Requirements for reports to be distributed to private fund investors 45 days after each calendar quarter (beginning after the second calendar quarter).
  
  
  
  

Private Fund Audit Rule 

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  • Requirement for SEC-registered private fund advisers to obtain a financial statement audit at least annually and upon liquidation
  
  
  • Requirement for audited financial statements to be delivered to private fund investors
  
  
  
  

Adviser-Led Secondaries Rule 

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  • Requirement for an SEC-registered private fund adviser to obtain a fairness opinion in connection with any adviser-led secondary transaction
  
  
  • Requirement to provide such fairness opinion to fund investors prior to the transaction in order to provide a check against an adviser’s conflicts of interest in such transaction
  
  
  
  

Prohibited Activities Rule 

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  • Prohibition of private fund advisers from engaging in certain sales practices, conflicts of interests, and compensation schemes that the SEC believes are contrary to the public interest and the protection of investors
  
  
  • Prohibited activities include:
    
    
    
    • Charging fees for accelerated monitoring, unperformed services, or fees associated with the examination or the investigation of the adviser
    
    
    • Seeking reimbursement, indemnification, exculpation, or limitation of certain adviser liabilities
    
    
    • Reducing potential clawbacks for taxes applicable to the adviser or its related persons
    
    
    • Charging fees or expenses related to portfolio investment on a non-pro rata basis
    
    
    • Receiving an extension of credit from a private fund client.
    
    
    
    
  
  
  • This Proposed Rule would apply to all advisers to private funds, regardless of whether they are registered with the SEC
  
  
  
  

Preferential Treatment Rule 

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  • Prohibition of private fund advisers from providing any preferential treatment to any investor in the private fund unless the adviser provides written disclosures to prospective and current investors regarding all preferential treatment being provided to investors in the fund
  
  
  • Requirement for an adviser describe specifically the preferential treatment in order to convey its relevance to other investors
  
  
  • Prohibition of granting preferential redemption rights or preferential transparency rights to any private fund investor
  
  
  • This Proposed Rule would apply to all advisers to private funds, regardless of whether they are registered with the Commission
  
  
  
  

Books and Records Rule Amendment

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  • Amendments to the books and records rule under the Advisers Act, which, if adopted as proposed, would require SEC-registered investment advisers to retain records related to the Proposed Rules
  
  
  
  

Compliance Rule Amendments 

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  • Requirement for all SEC-registered investment advisers to document their annual reviews
  
  
  • This rule would apply to all SEC-registered investment advisers, not just advisers to private funds
  
  
  
  

See the full Proposed Rule here. The public comment period for the Proposed Rules will remain open for at least sixty days following publication of the proposing release on the SEC’s website.

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“Proposed Rule: Private Fund Advisers ... - Sec.gov.” Accessed February 23, 2022. https://www.sec.gov/rules/proposed/2022/ia-5955.pdf.

“SEC Proposes Significant Regulatory Overhaul for Private Fund Advisers.” JD Supra. Accessed February 23, 2022. https://www.jdsupra.com/legalnews/sec-proposes-significant-regulatory-3496616/.

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