Written by Robert Quinn
Founder and CEO
Private Fund Advisers
Adopted: August 23, 2023
Effective: 60 days to 18 months after publication in the Federal Register
On August 23, 2023, the SEC adopted proposed rules relating to advisers of private funds. These rules impact both registered investment advisers (“RIAs”) and exempt reporting advisers (“ERAs”). The rules impact 6 different areas, noting that the Quarterly Statement rule, Audit rule and Adviser-led Secondaries rule will not apply to the non-U.S. private fund clients of an SEC-registered offshore adviser . Unregistered advisers relying on the foreign private adviser exemption and advising U.S. funds should consider these rules in the context of their activities focused on U.S. investors.
1. Restricted Activities
| Topic | Final Rule | Applies to | Implementation Date |
|---|---|---|---|
| Compliance Fees and Expenses | Timely disclosure: Charging a private fund for fees and expenses related to an SEC examination is permitted only if the adviser notifies the fund investors of these fees and expenses and the specific dollar amount within 45 days of the end of the fiscal quarter in which the charge occurs.
Investor Approval: Charging a private fund for investigation fees and expenses is permitted only with both the disclosure and consent of the majority of the fund’s unaffiliated investors. Exception: the adviser cannot charge to the fund fees and expenses related to an investigation that leads to a sanction under the Advisers Act. |
RIAs ERAs |
For large advisers with $1.5 billion or more in regulatory assets under management attributable to private funds, 12 months following publication in the Federal Register. For small advisers, 18 months after publication. |
| Adviser Clawbacks for Taxes | Advisers cannot reduce the clawback by the amount of certain taxes unless the adviser notifies fund investors of the pre-tax and post-tax amounts of the clawback within 45 days of the end of the fiscal quarter in which the charge occurs. | RIAs ERAs |
For large advisers with $1.5 billion or more in regulatory assets under management attributable to private funds, 12 months following publication in the Federal Register. For small advisers, 18 months after publication. |
| Cost Allocations on a Pro-Rata Basis | Allocating fees and expenses to private funds on a non-pro rata basis is permitted only if:
(1) The allocation is fair and equitable, and (2) the adviser provides written notice in advance to fund investors with a description of how the allocation is fair and equitable under the circumstances. |
RIAs ERAs |
For large advisers with $1.5 billion or more in regulatory assets under management attributable to private funds, 12 months following publication in the Federal Register. For small advisers, 18 months after publication. |
| Borrowing from the Fund | Advisers are able to borrow money, securities, assets or receive a loan or extension of credit from a private fund if the adviser notifies the fund investors of the material terms of such activity and obtains written consent from a majority of the fund’s unaffiliated investors. | For large advisers with $1.5 billion or more in regulatory assets under management attributable to private funds, 12 months following publication in the Federal Register. For small advisers, 18 months after publication. |
The SEC did not approve the proposed rules prohibiting an adviser from:
1. Charging the fund for services it does not provide or does not reasonably expect to provide; or
2. Inserting clauses seeking indemnification or a limitation on liability.
Although neither of these provisions were adopted, advisers should be wary of the SEC’s established expectations under an adviser’s fiduciary duty to clients.
2. Preferential Treatment
| Topic | Final Rule | Applies to | Implementation Date |
|---|---|---|---|
| Redemption Rights | Advisers may not grant a private fund investor the ability to redeem its interest on terms that the adviser reasonably expects to have a material, negative effect on other investors in that private fund or a similar pool of assets, unless the adviser offers to all other investors without qualification the preferential redemption rights or the ability to redeem as required by applicable law. | RIAs
ERAs |
For large advisers with $1.5 billion or more in regulatory assets under management attributable to private funds, 12 months following publication in the Federal Register. For small advisers, 18 months after publication. |
| Information Rights | Advisers may not provide portfolio information to any private fund investor if the adviser reasonably expects that providing the information would have a material, negative effect on other investors in that private fund, unless the adviser offers such information to all other fund investors at substantially the same time. | RIAs
ERAs |
For large advisers with $1.5 billion or more in regulatory assets under management attributable to private funds, 12 months following publication in the Federal Register. For small advisers, 18 months after publication. |
| Other Preferential Treatment | Prohibits advisers from providing to any private fund investor any other preferential treatment related to any material economic terms unless the adviser provides written notice of specific information regarding such preferential treatment to prospective investors prior to their investment in the private fund. | RIAs
ERAs |
For large advisers with $1.5 billion or more in regulatory assets under management attributable to private funds, 12 months following publication in the Federal Register. For small advisers, 18 months after publication. |
| Current and Annual Disclosure | All private fund advisers will be required to provide current investors with a comprehensive,annual disclosure of all preferential treatmentprovided by the adviser or its related persons.
All private fund advisers will also be required to distribute to current investors a written notice of all preferential treatment the adviser has provided to other fund investors:
|
RIAs
ERAs |
For large advisers with $1.5 billion or more in regulatory assets under management attributable to private funds, 12 months following publication in the Federal Register. For small advisers, 18 months after publication. |
3. Quarterly Statements
| Topic | Final Rule | Applies to | Implementation Date |
|---|---|---|---|
| Distribution | Mandatory quarterly statements for each private fund that has at least two full fiscal quarters of operating results, with statements for Q1, Q2, and Q3 due within 45 days of quarter-end (or 75 days for funds of funds).
Quarterly statements for Q4 due within 90 days of the end of each fiscal year (120 days for funds of funds). |
RIAs | 18 months following publication in the Federal Register. |
| Fund-Level Disclosure | Each quarterly statement must include a table showing:
|
RIAs | 18 months following publication in the Federal Register. |
| Portfolio Investment-Level Disclosure | Each quarterly statement must include a separate table showing all portfolio investment-level fees and expenses allocated or paid to the adviser (both before and after fee offsets). | RIAs | 18 months following publication in the Federal Register. |
| Performance Information | Each quarterly statement must include:
For closed-ended funds, the statement must include the following performance measures shown since inception (calculated with and without the impact of any fund-level subscription facilities):
Advisers must also provide fund investors with a statement of contributions and distributions. |
RIAs | 18 months following publication in the Federal Register. |
4. Annual Audits
| Topic | Final Rule | Applies to | Implementation Date |
|---|---|---|---|
| Annual Audits | Audited financial statements must be prepared annually and upon liquidation by an independent public accountant in accordance with U.S. GAAP (or, in the case of foreign private funds, reconciled with U.S. GAAP) and promptly distributed to investors. This requirement can be satisfied by compliance with Rule 206(4)-2 of the Advisers Act (the current “Custody Rule”). | RIAs | 18 months following publication in the Federal Register. |
5. Adviser-led Secondaries
| Topic | Final Rule | Applies to | Implementation Date |
|---|---|---|---|
| Fairness Opinion | Advisers must obtain a fairness opinion or a valuation opinion from an independent opinion provider before closing on an investment in an adviser-led secondary transaction. | RIAs | For large advisers with $1.5 billion or more in regulatory assets under management attributable to private funds, 12 months following publication in the Federal Register. For small advisers, 18 months after publication. |
6. Compliance Matters
| Topic | Final Rule | Applies to | Implementation Date |
|---|---|---|---|
| Annual Reviews | Registered advisers must, at least annually, review and document compliance reviews in writing. | RIAs | 60 days following publication in the Federal Register. |
[1] At this early stage, offshore advisers should exercise caution and consider the extent to which the application of the new rules to U.S. funds implicate considerations such as fairness, operational parity and the expectations of investors in the non-U.S. funds.
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