SEC's Proposed Rules Target Advisers to Private Funds

The U.S. Securities and Exchange Commission ("SEC") has proposed multiple rules designed to enhance investor transparency and SEC reporting.

On February 9, 2022, the SEC proposed new rules focused on private fund advisers' practices, reporting, and disclosures ("Proposed Rules"). The Proposed Rules would apply to all SEC registered advisers to private funds, and a portion of the Proposed Rules apply to unregistered advisers to private funds. The Proposed Rules are subject to a public comment period through April 11, 2022, or 30 days following publication in the Federal Register, whichever is later.  

The Proposed Rules, among other things, address the following issues and include a one-year transition period for compliance: 

Prohibited Activities Rule 

Prohibit, regardless of disclosure, all private fund advisers (whether or not registered ) from: (i) charging certain fees and expenses to a private fund or its portfolio investments for services the adviser does not, or does not reasonably expect, to provide (e.g., accelerated monitoring fees), fees associated with an examination or investigation of the adviser, and regulatory and compliance costs of the adviser; (ii) seeking reimbursement, indemnification exculpation, or limitation of its liability for a breach of fiduciary duty, willful misfeasance, bad faith, negligence, or recklessness; (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) borrowing or receiving an extension of credit from a private fund client.  

Preferential Treatment Rule 

Prohibit, regardless of disclosure, all private fund advisers from providing preferential terms to certain investors regarding redemptions or information about portfolio holdings or exposures. In addition, the rule would prohibit all private fund advisers from providing other preferential treatment unless specifically disclosed in writing to current and prospective investors. For instance, if investors pay lower fees, the lower fee terms must be disclosed.  

Quarterly Statement Rule 

Require registered private fund advisers to provide investors with a quarterly statement with a detailed accounting of: (i) amounts paid to the adviser; (ii) amounts paid by the private fund; and (iii) prescribed information with respect to portfolio investments. The information would include performance information and information about offsets, rebates, and waivers.  

Private Fund Audit Rule 

Require registered private fund advisers to obtain an audit of each private fund they advise at least annually and upon liquidation and promptly distribute such audit to investors. The Proposed Rules also would require prompt notification to the SEC upon certain events. 

Adviser-Led Secondaries Rule 

Require registered private fund advisers to provide a fairness opinion for an adviser-led secondary transaction and a summary of material business relationships with the opinion provider.  

Compliance Rule Amendments 

Require all registered advisers to document the annual compliance review in writing.

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