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Update: SEC proposes new rules for private fund advisers

24 May 2022

On February 9, 2022, the Securities and Exchange Commission (“SEC”) proposed a series of new rules under the Investment Advisers Act of 1940, as amended (“Advisers Act”) that would impose significant new regulatory requirements, obligations, and restrictions on private fund advisers.

  • If adopted, the proposed new rules would:

    • Require private fund advisers to provide private fund investors with quarterly reports that set forth detailed information regarding private fund performance, fees and expenses;
    • Require private fund advisers to obtain an annual audit for each private fund;
    • Require private fund advisers, in connection with an adviser-led secondary transaction, to provide investors with a fairness opinion and summary of material business relationships between such adviser and the opinion provider;
    • Prohibit all private fund advisers from engaging in certain practices and activities that the SEC deems to be contrary to the public interest;
    • Prohibit all private fund advisers from providing certain types of preferential treatment that have a material negative effect on other investors, while also prohibiting any other types of preferential treatment unless properly disclosed to investors; and
    • Require all advisers, including those who do not advise private funds, to document their annual compliance reviews pursuant to Rule 206(4)-7 under the Advisers Act.

  • Because the Proposed Rules do not contain any grandfathering provisions, if adopted in their current form, they would apply to existing governing agreements in addition to those entered into following the effective date of the Proposed Rules. Furthermore, while some of the Proposed Rules would only be mandated for investment advisers, other rule changes would be mandated for SEC-registered and unregistered investment advisers alike (including SEC-registered investment advisers, SEC and state exempt reporting advisers, state-registered investment advisers, and any other investment advisers not registered with the SEC).

  • At the same time, the SEC also proposed new rules related to cybersecurity for SEC-registered investment advisers and funds.  If adopted, the Cybersecurity Rule Proposal would:

    • Require SEC-registered advisers and funds to adopt and implement written policies and procedures that are reasonably designed to address cybersecurity risks;
    • Require SEC-registered advisers to confidentially report significant cybersecurity incidents to the SEC through new a Form ADV-C;
    • Enhance SEC-registered adviser and fund disclosures to investors related to cybersecurity risks and incidents.

  • The SEC's new proposals have the potential to significantly affect private fund investment advisers and private funds, forcing investment advisers to private funds to think about future compliance issues. These Proposed Rules have only been proposed at this stage and are still subject to public comment before any final rules are adopted. AIMA and other industry participants have been actively working to submit responses to the SEC.  The SEC is proposing a one-year transition period after final rules are adopted to provide time for investment advisers to come into compliance with the Proposed Rules

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