2023 SEC Private Fund Adviser Reforms: Summary of Changes

On August 23, 2023, the SEC adopted new rules under the Investment Advisers Act of 1940 (Advisers Act) to increase transparency from private fund advisers to their investors. The new rules require private fund advisors to equip their investors with more information pertaining to performance and expense metrics, and it prohibits engaging in certain preferential treatment practices to protect investors.

What Are the Changes?

For private fund advisers registered with the SEC:

1. Quarterly Statement Rule: Private funds are required to distribute a quarterly statement to their investors, disclosing information such as private fund performance, investment costs, and fees and expenses paid by the private fund.
   • If the fund is not a fund of funds, this quarterly statement must be distributed within 45 days after quarter end and 90 days after year-end.
   • For a fund of funds, quarterly statements must be distributed within 75 days after quarter end and 120 days after year-end.
2. Private Fund Audit Rule: Fund advisers are required to undergo an annual audit of their financial statements. 
3. Adviser-Led Secondaries Rule: Registered private fund advisers must obtain a fairness opinion OR valuation opinion when offering existing investors the option to transfer their interests from one fund to another.
4. Books and Records Rule Amendments: These amendments allow the SEC to assess an adviser’s compliance with the rules.

For all private fund advisers:

Restricted Activities Rule Summary

Private fund advisers are restricted from the following:

1. Charging certain fees and expenses to a fund or its portfolio investments without investor disclosure, such as fees for unperformed services and fees associated with an investigation of the adviser.
2. Charging or allocating any fees or expenses that are related to compliance, regulatory, or examination activities without disclosure to the fund’s investors.
3. Reducing the amount of an adviser’s claw back, unless investors are informed of both the pre-tax and post-tax amounts.
4. Charging fees or expenses related to a portfolio investment on a non-pro rata basis when multiple investors have invested in the same portfolio investment, unless the adviser is able to provide advance written notice and provide evidence that the approach is equitable.
5. Borrowing or receiving an extension of credit from a private fund client without disclosure and consent from fund investors.

The Preferential Treatment Rule Summary

This rule prohibits all private fund advisers from providing preferential treatment to investors unless disclosure is provided to the investor prior to investment. The SEC is grandfathering certain prohibition aspects of the Preferential Treatment Rule and the Restricted Activities Rule that require investor consent. For those governing agreements that were entered into prior to the compliance date, legacy status would apply if the applicable rule required the agreements to be amended. Otherwise, all private fund advisers are prohibited from providing preferential terms to investors regarding:

1. Certain redemptions from the fund, unless required by law or the private fund adviser offers this option to all other investors.
2. Certain preferential information about portfolio holdings unless this information is also offered to all other investors.

The Compliance Rule Amendments Summary

An amendment to the compliance rule requires that all registered advisers document the annual review of their compliance policies and procedures.

When Do These Rules Take Effect?

Rule	Timeframe
Quarterly Statement Rule	18 months after the date of publication in the Federal Register.
Private Fund Audit Rule	18 months after the date of publication in the Federal Register.
Advisor-Led Secondaries Rule	For advisers with $1.5B or more in private funds assets under management, 12 months after the date of publication in the Federal Register; for advisers with less than $1.5B in private funds assets under management, 18 months after the date of publication in the Federal Register.
Restricted Activities Rule	For advisers with $1.5B or more in private funds assets under management, 12 months after the date of publication in the Federal Register; for advisers with less than $1.5B in private funds assets under management, 18 months after the date of publication in the Federal Register.
Preferential Treatment Rule	For advisers with $1.5B or more in private funds assets under management, 12 months after the date of publication in the Federal Register; for advisers with less than $1.5B in private funds assets under management, 18 months after the date of publication in the Federal Register.
Compliance Rule	Required 60 days after publication in the Federal Register.

What Are the Implications?

The SEC’s new rules have the potential to significantly impact the regulation of private fund advisers, shaping how these entities operate and interact with investors. While the changes aim to foster innovation and improve transparency, they also introduce new challenges and considerations for both advisers and investors.

Striking the right balance between facilitating growth and maintaining investor protection will be crucial as these rules reshape the landscape of private fund adviser regulation. As these rules are implemented, stakeholders across the financial industry will closely monitor these developments to assess their practical implications and potential long-term effects.

For expert support interpreting and acting on the rule changes, contact Biovell .