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Summary of SEC’s Finalized Private Fund Adviser Rules

September 19, 2023


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Regulatory Alert

The United States Securities and Exchange Commission (“SEC”) recently issued a final set of rule amendments under the Investment Advisers Act of 1940, primarily aimed at enhancing the regulatory framework governing investment advisers to private funds. The new set of rules, as  described in SEC Release No. IA-6383, is designed to protect investors who invest directly or indirectly in private funds. It focuses on increasing transparency in compensation arrangements and prohibiting conflicted arrangements involving private funds. Through an audited financial statement requirement, the new rules also aim to prevent fraudulent activities by registered investment advisers advising private funds. Finally, this set of new rules includes an amendment requiring all SEC-registered investment advisers to document in writing the annual review of their compliance policies and procedures.

Key Provisions

The following is a brief summary of key provisions of this new set of rules for private fund advisers.  As noted below, the applicability of the certain requirements and corresponding compliance dates may vary based upon whether a private fund adviser is registered with the SEC and the amount of private fund assets managed by the adviser.

  1. Private Fund Quarterly Statements. A registered private fund adviser is required to provide quarterly statements detailing fees, expenses and performance metrics of the private fund to each private fund investor. These statements must be prepared and distributed in a specified format, and records must be maintained for compliance. With respect to this requirement, the compliance date for all private fund advisers regardless of size is March 14, 2025.
  2. Annual Audit for Each Fund. A registered private fund adviser must cause each private fund it advises to undergo an annual financial statement audit and cause the audited financial statements to be delivered to each private fund investor. The rule outlines the requirements for accountants performing private fund audits including auditing standards. With respect to this requirement, the compliance date for all private fund advisers regardless of size is March 14, 2025.
  3. Adviser-Led Secondary Transactions. In connection with adviser-led secondary transactions (i.e., transaction initiated by the registered private fund adviser or its related person which offers the investor a choice between selling or converting all or portion of the investor’s interest in the private fund), a registered private fund adviser is required to obtain distribute to the private fund investors a fairness or valuation opinion from an independent opinion provider. The rule also mandates the distribution of material business relationship summaries. For a large private fund adviser (i.e., $1.5 billion or more in private funds assets), the compliance date is September 14, 2024. For a small private fund adviser (i.e., less than $1.5 billion in private funds assets), the compliance date is March 14, 2025.
  4. Restricted Activities. All private fund advisers, including those not registered with the SEC, are restricted from engaging in certain activities unless they provide specified disclosures and, for certain activities, obtain consent from the private fund investors. For example, a private fund adviser may not charge a private fund the expenses associated with a governmental investigation of the adviser unless the investigation did not result in a sanction and a majority of the investors who are not related persons of the advisor consent to such charge. The rule also prevents a private fund adviser from borrowing money, securities, or other private fund assets, or receiving a loan or an extension of credit from a private fund, unless the adviser receives written consent from all private fund investors or a majority of investors who are not related persons of the adviser. For a large private fund adviser (i.e., $1.5 billion or more in private funds assets), the compliance date is September 14, 2024.  For a small private fund adviser (i.e., less than $1.5 billion in private funds assets), the compliance date is March 14, 2025.
  5. Preferential Treatment. All private fund advisers are prohibited from providing certain types of preferential treatment that would have a material, negative effect on other investors, subject to certain exceptions. For instance, a private fund adviser cannot grant generally an 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 unless all existing and future investors have a similar right. Similarly, a private fund adviser cannot provide information regarding the private fund’s holdings or exposures to any investor in the private fund if the adviser reasonably expects that providing the information would have a material, negative effect on other investors in that private fund, except if the private fund adviser offers at the same time such information to all other investors. For a large private fund adviser (i.e., $1.5 billion or more in private funds assets),  the compliance date is September 14, 2024.  For a small private fund adviser (i.e., less than $1.5 billion in private funds assets), the compliance date is March 14, 2025.
  6. Books and Records. Amendments have been made to the books and records rule to facilitate compliance with this new set of rules for private fund advisers. The compliance date for the books and records requirements corresponds to the compliance date of the applicable rule’s compliance date.
  7. Compliance Rule. Amendments have also been made SEC Rule 206(4)-7, affecting all registered investment advisers, including those that do not advise private funds, to document in writing the annual review of their compliance policies and procedures. Please review SEC Is Now Requiring An Investment Adviser to Document Annual Compliance Review In Writing for additional details. The compliance date for this amendment is 60 days after the publication in the Federal Register. As a result, an SEC registered investment adviser’s compliance review commenced after November 13, 2023, should be documented in writing.

Upcoming Complimentary Webinar

To learn more about the specific details of this set of new rules for private fund advisers, please consider attending our complimentary webinar, Preparing for the SEC’s New Private Fund Adviser Regulations, on Thursday, September 28, 2023, at 12:00 p.m. U.S. Central Daylight Time.  You can register at https://www.ria-compliance-consultants.com/product/preparing-for-the-secs-new-private-fund-regulations/ .

Related Resources

Private Fund – Common Issues for Adviser to Private Fund

Recorded Webinar – Compliance Concerns with Private Funds

RIA Express – Compliance Review

Annual Review – Spreadsheet for Risk Assessment, Supervision Chart and Assessment Log

CCO – Third-Party – Confirming Annual Review Completion

SEC Fact Sheet: Private Fund Adviser Reforms

SEC Is Now Requiring An Investment Adviser to Document Annual Compliance Review In Writing (8/25/2023)

SEC Proposes Amendments to Form PF for Investment Advisers to Private Funds (1/27/2022)

SEC Requires RIAs to Complete Risk Assessment as Part of Annual Compliance Review (12/02/2020)

Compliance Concerns for Private Funds (9/15/2020)

SEC Risk Alert – Investment Advisers Managing Private Funds (7/14/2020)

Private Fund Adviser Enforcement Action (6/26/2018)

Nebraska Private Fund Adviser Exemption (5/17/2016)

Repeat Compliance Program Deficiencies Result in SEC Enforcement Actions for Investment Advisers (11/05/2013)

Investment Advisers Must Review their Written Policies and Procedures at Least Annually (10/30/2013)

GAO Studies Feasibility of SRO for Investment Advisers to Private Funds (8/4/2011)

Disclosure

This regulatory alert is a brief summary which is general in nature and offered only for educational purposes. It should not be considered as a comprehensive review or analysis of this development. This communication is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation without further analysis. This regulatory alert is not a safe harbor or a legal opinion. The reader should study the actual guidance, rule or enforcement action in detail and consult with his or her compliance professionals.  This information in this regulatory alert may become out of date.

Posted by Bryan Hill
Labels: Annual Review, Private Funds, Regulatory Alert, SEC
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