SEC Adopts Long-Awaited and Heavily Debated Private Fund Adviser Rules
The U.S. Securities and Exchange Commission ("SEC") adopted multiple rules that will impact private funds, governing documents, and side letters.
On August 23, 2023, the SEC adopted rules focused on private fund advisers, related record keeping requirements, and requirements for written annual compliance reviews (the "Rules"). Originally proposed in February 2022, the SEC received extensive comments from industry participants; and the Rules have modifications from the proposed rules, particularly around restricted activities and preferential treatment. (Read our previous client Alert, SEC's Proposed Rules Target Advisers to Private Funds). Notwithstanding the changes from the proposed version, the Rules will impose new obligations and limitations that will impact the operation and administration of private funds. The Rules are effective 60 days following publication in the Federal Register, with compliance dates of either 60 days, 12 months, or 18 months from publication ("Compliance Date").
While the SEC's adopting release contains extensive commentary and explanation of their rationale, the Rules are primarily focused on the following:
Restricted Activities Rule
(Compliance Date of 12 months for advisers with $1.5 billion or more in private fund assets and 18 months for others)
Applicable to: All private fund advisers (whether or not registered).
Description: Restricts, subject to certain investor disclosure and consent requirements: (i) charging fees or expenses associated with an investigation of the adviser; (ii) charging fees or expenses associated with an examination of the adviser, and regulatory and compliance costs of the adviser; (iii) reducing the amount of an adviser clawback by the amount of certain taxes; (iv) charging fees or expenses related to a portfolio investment on a non-pro rata basis; and (v) an adviser from borrowing or receiving an extension of credit from a private fund client.
Important Note: Investor consent requirements for (i) and (v) above do not apply to funds operating before the Compliance Date (except regulatory violations) if the applicable rule requires governing document amendments.
Preferential Treatment Rule (including side letters)
(Compliance Date of 12 months for advisers with $1.5 billion or more and 18 months for others)
Applicable to: All private fund advisers (whether or not registered).
Description: Prohibits preferential terms regarding redemptions or portfolio information or exposures that the adviser reasonably expects would have a material, negative effect on other investors. In addition, the rule requires disclosure of: (i) any preferential material economic terms to prospective investors; and (ii) all preferential terms to current investors.
Important Note: Requirements related to redemptions and portfolio information do not apply to funds operating before the Compliance Date if the applicable rule requires governing document amendments.
Quarterly Statement Rule
(Compliance Date of 18 months)
Applicable to: Registered private fund advisers.
Description: Requires a quarterly statement with a detailed accounting of: (i) amounts paid to the adviser; (ii) amounts paid by the private fund; and (iii) all portfolio investment compensation paid to the adviser. The statement must also include detailed performance information, information related to offsets, rebates, and waivers; and detailed descriptions of the calculations and cross references to governing documents. Generally, the statements must be delivered within 45 days of the end of the first three fiscal quarters and 90 days after each fiscal year end.
Private Fund Audit Rule
(Compliance Date of 18 months)
Applicable to: Registered private fund advisers.
Description: Requires Custody Rule-compliant audited financial statements for each private fund.
Adviser-Led Secondaries Rule
(Compliance Date of 12 months for advisers with $1.5 billion or more and 18 months for others)
Applicable to: Registered private fund advisers.
Description: Requires a fairness opinion or valuation opinion for an adviser-led secondary transaction and a summary of material business relationships with the opinion provider; each provided prior to a binding election by fund investors.
Compliance Rule Amendments
(Compliance Date of 60 days)
Applicable to: All registered advisers.
Description: Requires annual compliance reviews to be in writing.
