Written by Robert Quinn
Founder & CEO
On February 9th, the Securities and Exchange Commission (“SEC”) proposed sweeping new rules to govern private funds. The comment period on the proposal expires 60 days from the proposal date or 30 days from publication in the Federal Register, whichever is sooner – although many trade bodies have requested an extension to respond, given the heft and complexity of the new proposals.
Some of the proposed rules apply to registered investment advisers and others apply to all advisers.
The proposed rules include:
1. Quarterly Statements
Registered advisers would be required to provide a statement for each private fund to investors within 45 days of calendar quarter end. The following items are required to be included in the statement:
An illiquid fund is defined as one that:
A fund that does not meet all of the above criteria is considered a liquid fund and will report performance information similar to mutual funds:
2. Audited Financial Statements
All private funds managed by a registered adviser would be required to have an audit from an independent public accountant for each private fund they advise at least annually and upon liquidation. Audited financial statements must be distributed to investors “promptly” upon completion of the audit, although it is likely to be within 120 days of the end of the fund’s fiscal year for those private fund managers relying on the Custody Rule 206(4)-2.
Further, the auditor is required to notify the SEC’s Division of Examinations upon the auditor’s termination or issuance of a modified opinion.
3. Annual Reviews
Registered advisers will now have to complete their annual compliance reviews in writing, retained under the books and records requirements, and subject to SEC inspection.
4. Adviser-led Secondaries
For registered advisers engaging in an adviser-led secondary transaction for a private fund, the adviser must deliver to all investors a fairness opinion prepared by an independent opinion provider and a summary of any material relationships between the adviser and provider.
5. Prohibited Practices
The SEC proposes to prohibit both registered and unregistered advisers to private funds from the following:
The focus on private fund advisers is a consistent theme. In June 2020, the SEC issued “Observations from Examinations of Investment Advisers Managing Private Funds” where the regulator expressed concerns on fees and expenses, a topic that has been a priority for several years, and conflicts of interest. These included conflicts related to:
The SEC further highlighted deficiencies in January 2022 where the regulator reiterated an adviser’s fiduciary duty to their clients. They specifically identified conduct inconsistent with disclosures and misleading disclosures regarding performance, inaccurate performance calculations and misleading statements regarding awards and other claims.
So, while some in the industry may be surprised by the volume of proposed rules in the past month, the rules are clearly a continuation of the SEC priorities – addressing what they see as areas where significant improvement is needed.