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Private fund impact of SEC adoption of final rules on private fund adviser reforms
Oct. 6, 2023 · Authored by Mike Purrazzella and Patrick Warch
In Aug. 2023, the Securities and Exchange Commission (SEC) adopted new rules under the Investment Advisers Act of 1940 for private fund advisers, following a comment period on previously proposed new rules. These final rules excluded some of the more contested parts of the initial proposal. While enhanced compliance requirements place an additional burden on private funds advisers, the SEC deems these essential. SEC chairman Gary Gensler stated, “Private funds and their advisers play an important role in nearly every sector of the capital markets. By enhancing advisers’ transparency and integrity, we will help promote greater competition and thereby efficiency. Consistent with our mission and Congressional mandate, we advance today’s rules on behalf of all investors – big or small, institutional or retail, sophisticated or not.” Given the critical role that private funds play in shaping the financial markets and impacting individuals through both direct investments and indirect exposure, transparency, and timeliness of information is crucial.
The rules have three application tranches for advisers as noted below. Based on the facts and circumstances relating to each respective fund, there are some exceptions to the application which can be seen in the full text of the rule.
- These rules do not apply to securitized asset funds (CLOs) or to offshore offerings.
- Restricted activities rule - prohibited from engaging in certain activities that are contrary to the public interest and protection of investors unless certain disclosures or consent is obtained from investors.
- Preferential treatment rule - prohibited from providing certain types of preferential treatment that may have a material negative effect on other investors. Some of the new prohibited items will be allowed for existing funds under the legacy status. This applies to governing agreements that were entered into prior to the compliance date.
- These rules do not apply to securitized asset funds (CLOs) or to offshore offerings.
- Quarterly statement rule: Provide quarterly statements to investors that include information on fund performance, fees and expenses. If the private fund is not a fund of funds, then statements must be distributed within 45 days after the end of each of the three quarters and within 90 days after the end of the fiscal year. If the private fund is a fund of funds, then statements must be distributed within 75 days after the three quarters of the year and within 120 days after the end of the fiscal year.
- Private fund audit rule: Obtain an annual audit. For each private fund that is not a fund of fund, audited financial statements should be distributed to current investors within 120 days of the end of the fiscal year. For each private fund that is a fund of fund, audited financial statements should be distributed within 180 days of the end of the fiscal year.
- Adviser-led secondaries rule: Obtain a fairness opinion or valuation opinion in connection with an adviser-led secondary transaction, such as offering investors the option to sell their interest or exchanging it for another investment vehicle.
- Recordkeeping rule amendment: Follow enhanced books and records amendments that focus and promote internal and external monitoring of compliance.
- Compliance rule amendment: the new rules require all registered advisers, including those who do not advise on private funds, to document in writing the annual review of their compliance policies and procedures.
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