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SEC adopts increased reform for private funds

25 September 2023

The SEC has adopted new rules that require SEC-registered private fund advisers to improved standards and protect investors.

On August 23, 2023, the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) voted in support of adopting new rules and regulations that aim to enhance the regulation of private fund advisers. The SEC believes these new rule changes, under the Investment Advisers Act of 1940 (the “Advisers Act”), are designed to safeguard investors in private funds by increasing transparency into certain practices. The new rules establish requirements to address practices that are contrary to the public interest, potentially harm investors, and prohibit or restrict adviser activity.

For SEC-registered private fund advisers:

Under these new provisions of the Advisers Act, SEC-registered private fund advisers must adhere to the following: 

Quarterly statement rule: Prepare and distribute quarterly statements to investors containing detailed information on fees, expenses, and performance. The SEC believes simple and clear disclosure of this information is fundamental to the financial advisor-investor relationship as it underpins informed investment decisions. If the private fund is not a fund of funds, then a quarterly statement must be distributed within 45 days after the first three fiscal quarter ends of each fiscal year and 90 days after the end of each fiscal year.

Advisers are also required to adhere to a standardized method of performance reporting within quarterly statements distributed to investors:

  • Liquid funds: The rule requires liquid funds advisers to show performance based on net total return annually. This must show the 10 fiscal years prior to the quarterly statement or since the fund’s inception (whichever is shorter) The performance must be demonstrated over one-, five-, and 10- fiscal year periods, and on a cumulative basis for the current fiscal year as of the end of the most recent fiscal quarter.
  • Illiquid funds: The rule requires illiquid fund advisers to show performance based on internal rates of return and invested capital since inception. Advisers are also meant to present a statement of contributions and distributions.

Private fund audit rule: Obtain and distribute an annual audit for each private fund, in adherence with the requirements under Rule 206(4)-2 of the Advisers Act (the “Custody Rule”). In line with the SEC’s standards and guidelines under the Custody Rule, the annual audit must be performed by an independent public accountant (e.g., registered with and subject to review by the Public Company Accounting Oversight Board (PCAOB)) and prepared in accordance with generally accepted accounting principles (e.g., US GAAP). 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 secondary rule: Obtain a fairness opinion or valuation opinion in connection with an adviser-led secondary transaction. The rule also requires the adviser to prepare and distribute a summary to private fund investors. The summary includes 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 improve the SEC’s ability to review an adviser’s compliance, the Commission has amended the existing books and records rules. Compliance is reviewed with the quarterly statement rule, private fund audit rule, and adviser-led secondary rule.  Registered advisers are required to retain books and records related to the above.

For all private fund advisers:

The adopted regulations place restrictions on certain activities by all private fund advisers (including exempt reporting advisers), unless they satisfy certain disclosure and, in some cases, consent requirements, including:

Restrictions on certain activities: The amended rules place restrictions on certain activities which aim to protect investors and mitigate potential investor harm. The SEC believes these restrictions defend investors from activities that are contrary to public interest, including:

  • Charging or allocating fees and expenses to the private fund associated with an investigation or regulatory examination of the adviser, unless such fees and expenses are disclosed to and consent is received from investors (in any such event, and in accordance with the rule, advisers are prohibited from charging or allocating fees and expenses in such event that results in court or government-imposed sanction);
  • Charging the private fund for any regulatory, examination, or compliance fees or expenses of the adviser or its related persons, unless such arrangements are disclosed to investors;
  • Reducing the amount of any adviser clawback by actual, potential, or hypothetical taxes applicable to the adviser, its related persons, or their respective owners or interest holders, unless the adviser discloses the pre-tax and post-tax amount of the clawback to investors;
  • Charging or allocating fees and expenses related to a portfolio investment on a non-pro rata basis when more than one private fund or other client advised by the adviser or its related persons have invested in the same portfolio company;
  • Borrowing money, securities, or other fund assets, or receiving an extension of credit, from a private fund client without disclosure to, and consent from, fund investors;

Preferential treatment: The amended rules prohibit all private fund advisers from providing preferential terms to investors regarding:

  • 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
  • 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 and all terms are disclosed after the investor’s investment.

For all registered advisers:

Annual review requirement: An annual review of an adviser’s policies and procedures was considered to be best practice. However, the Commission has now mandated an annual review for all registered advisers, including those who do not advise private funds. The amended rules require all SEC-registered advisers to document, on at least an annual basis, a review of their compliance policies and procedures. Written documentation of the annual review will help the Commission to determine advisers’ compliance with the rules and identify potential compliance program weaknesses.

Next steps:

For the private fund audit rule and the quarterly statement rule, the compliance date will be 18 months after the date of publication in the Federal Register. Compliance with the amended Advisers Act compliance rule will be required 60 days after publication in the Federal Register.

How Apex can help:

Contact Apex Compliance Services for assistance with SEC compliance support, including: 

  • Investment adviser registration and regulatory filings, including Form ADV, Form CRS, and Form PF;
  • Rule 206(4)-7 annual report;
  • Compliance programs;
  • Policies and procedures;
  • Managed due diligence;
  • Vendor and service provider due diligence;
  • Compliance training for CCO and staff; and
  • Access to Apex personnel for ad hoc and on-demand compliance consulting.



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