The SEC has recently published new rules and amendments under the Investment Advisers Act of 1940 (Advisers Act) for registered private fund advisors that going forward are required to:
- Provide quarterly reports containing detailed information about performance, fees and expenses
- Conduct an annual audit for each private fund
- Obtain a fairness opinion or valuation opinion in connection with an adviser-led secondary transaction
- not engaging in certain activities and practices that are contrary to the public interest and the protection of investors unless they provide certain disclosures to investors, and in some cases, receive investor consent
- not providing certain types of preferential treatment that have a material negative effect on other investors and prohibit other types of preferential treatment unless disclosed to current and prospective investors
In addition to the obligations mentioned above, all registered advisers must document the annual review of their compliance policies and procedures.
According to the SEC, the details of the new requirements are as follows:
Registered Private Fund Advisers
Quarterly Statement Rule
The reforms require registered private fund advisers to distribute a quarterly statement to private fund investors. The statement must disclose fund-level information regarding performance, the cost of investing in the private fund, fees and expenses paid by the private fund, as well as certain compensation and other amounts paid to the adviser.
Private Fund Audit Rule
The reforms require registered private fund advisers to cause the private funds they advise to undergo a financial statement audit that meets the requirements of the audit provision in the Advisers Act custody rule (rule 206(4)-2)). These audits will provide an important check on the adviser’s valuation of private fund assets and protect private fund investors against the misappropriation of fund assets.
Adviser-Led Secondaries Rule
The reforms require a registered private fund adviser to obtain a fairness opinion or a valuation opinion when offering existing fund investors the option between selling their interests in a private fund and converting or exchanging their interests in the private fund for interests in another vehicle advised by the adviser or any of its related persons. The rule also requires the adviser to prepare and distribute to the private fund’s investors a summary of any material business relationships the adviser has or has had within the prior two years, with the independent opinion provider. This requirement will provide a check against an adviser’s conflicts of interest in structuring and leading such transactions.
Books and Records Rule Amendments
To facilitate the Commission’s ability to assess an adviser’s compliance with the rules, the reforms include amendments to the books and records rule under the Advisers Act for registered private fund advisers.
All Private Fund Advisers
Restricted Activities Rule
To address certain conflicts of interest that have the potential to lead to investor harm, the reforms include a new rule that restricts all private fund advisers from engaging in the following activities that are contrary to the public interest and the protection of investors:
- Charging or allocating to the private fund fees or expenses associated with an investigation of the adviser without disclosure and consent from fund investors. Further, an adviser may not charge fees or expenses related to an investigation that results or has resulted in a court or governmental authority imposing a sanction for a violation of the Advisers Act or the rules promulgated thereunder
- Charging or allocating to the private fund regulatory, examination, or compliance fees or expenses of the adviser, unless such fees and expenses are disclosed to investors
- Reducing the amount of an adviser clawback by the amount of certain taxes, unless the adviser discloses the pre-tax and post-tax amount of the clawback to investors
- Charging or allocating fees or expenses related to a portfolio investment on a nonpro rata basis, unless the allocation approach is fair and equitable and the adviser distributes advance written notice of the non-pro rata charge and a description of how the allocation approach is fair and equitable under the circumstances
- Borrowing or receiving an extension of credit from a private fund client without disclosure to, and consent from, fund investors
Preferential Treatment Rule
To address the material, negative effects of specific types of preferential treatment on other investors, the reforms prohibit all private fund advisers from providing preferential terms to investors regarding a) certain redemptions from the fund, unless the ability to redeem is required by applicable law or the adviser offers the preferential redemption rights to all other investors without qualification; and b) certain preferential information about portfolio holdings or exposures, unless such preferential information is offered to all investors. In addition, this rule prohibits all private fund advisers from providing preferential treatment to investors, unless certain terms are disclosed in advance of an investor’s investment in the private fund and all terms are disclosed after the investor’s investment.
Legacy Status
The Commission is providing legacy status for the prohibitions aspect of the Preferential Treatment Rule and the aspects of the Restricted Activities Rule that require investor consent. The legacy status provisions apply to governing agreements that were entered into prior to the compliance date if the applicable rule would require the parties to amend the agreements.
All Registered Advisers
Compliance Rule Amendments
The reforms include amendments to the compliance rule under the Advisers Act requiring all registered advisers, including those that do not advise private funds, to document in writing the required annual review of their compliance policies and procedures. Written documentation of the annual review will help the Commission determine advisers’ compliance with the rules and identify potential compliance program weaknesses.
The Quarterly Statement Rule, Private Fund Audit Rule, Adviser-Led Secondaries Rule, Restricted Activities Rule, and Preferential Treatment Rule do not apply to investment advisers with respect to securitized asset funds they advise.
Implementation time frames
The Private Fund Audits and the Quarterly Statements must be implemented during the next 18 months. The implementation time frame for the Adviser-Led Secondaries Rule, the Preferential Treatment Rule, and the Restricted Activities Rule depend on the assets under management of the private fund adviser: 12 months for advisers with $1.5 billion or more and 18 months for advisors with less than $1.5 billion.
For further details please see https://www.sec.gov/news/press-release/2023-155.
If you have any questions or need any help with your reporting obligations under the Investment Advisers Act, please contact our team at any time.
