SEC Proposes Extensive Rule Changes for Private Fund Advisers


On February 9, 2022, the Securities and Exchange Commission (SEC) proposed new rules and amendments under the Investment Advisers Act of 1940 (Advisers Act) to enhance the regulation of private fund advisers.  The proposed new rules are intended to provide additional protection for private fund investors by increasing their visibility into certain practices, establishing requirements to address practices that have the potential to lead to investor harm, and prohibiting adviser activity that is contrary to the public interest and the protection of investors.  If these proposed rules are adopted, private fund advisers will need to adopt policies and procedures to comply with the new requirements, which will impact private fund operations and accounting processes and may require significant changes to governing documents, offering memoranda and side letters. The proposed rules are open for public comment until the later of (i) 30 days from publication in the Federal Register and (ii) 60 days from February 9, 2022.  We note that this time period for public comments is relatively short given the extensive nature of the proposed rules.

The full text of the proposed rules can be found here.  Below is a brief summary of the proposed new rules:

Quarterly Reporting

Under the proposed rules, any private fund adviser registered with the SEC would be required to prepare quarterly statements detailing information about fees, expenses and performance for any private fund that it advises (directly or indirectly) and distribute such quarterly statement to the private fund’s investors within 45 days after each calendar quarter end, unless a quarterly statement that complies with the proposed rule is prepared and distributed by another person.  

Mandatory Annual Audit

Registered private fund advisers would be required to obtain an annual audit for each private fund that it advises (directly or indirectly) and distribute the audited financial statements to investors “promptly” after the audit’s completion.  Additionally, the proposed rule would require an adviser to enter into, or cause the private fund to enter into, a written agreement with the independent public accountant performing the audit to notify the SEC (1) promptly upon issuing an audit report to the private fund that contains a modified opinion and (2) within 4 business days of resignation or dismissal from, or other termination of, the engagement, or upon removing itself or being removed from consideration for being reappointed.

Adviser-led Secondary Transactions

In connection with an adviser-led secondary transaction, the proposed rules would require registered private fund advisers to distribute to investors a written opinion stating the price being offered is fair and a written summary of certain material business relationships between the adviser and the opinion provider.  As defined in the proposed rule, “adviser-led secondary transactions” are transactions initiated by the investment adviser or any of its related persons that offer a private fund’s investors the choice to (1) sell all or a portion of their interests in the private fund; or (2) convert or exchange all or a portion of their interests in the private fund for interests in another vehicle advised by the adviser or any of its related persons. 

Prohibited Activities

The proposed rules would also prohibit all private fund advisers, including those that are not registered with the SEC or pursuant to state law, exempt reporting advisers and persons prohibited from registration, from engaging in certain activities and practices that are contrary to the public interest and the protection of investors.  Such activities include (1) reducing any adviser clawback by the amount of certain taxes, (2) seeking reimbursement, indemnification, exculpation or limitation of the adviser’s liability by the private fund or its investors for breach of fiduciary duty, willful misfeasance, bad faith, negligence, or recklessness in providing services to the private fund, and (3) borrowing money, securities or other fund assets, or receiving an extension of credit, from a private fund client.  The proposed rule would also prohibit an adviser from charging certain fees or expenses to a private fund or portfolio investment, including, for example, fees and expenses associated with an examination or investigation of the adviser or its related persons by any governmental or regulatory body, and regulatory or compliance fees and expenses of the adviser or its related persons, even where such fees and expenses are otherwise disclosed.

Prohibition of Preferential Treatment

All private fund advisers, including those that are not registered with the SEC or pursuant to state law, exempt reporting advisers and persons prohibited from registration, would be prohibited from providing preferential terms to certain investors regarding liquidity rights or information about portfolio holdings or exposures.  The proposed rule would also prohibit these advisers from providing any other preferential treatment to any investor in the private fund unless the adviser provides written disclosures to prospective and current investors in the private fund regarding all preferential treatment the adviser or its related persons are providing to other investors in the same fund. 

Under the proposed rule, an adviser would need to describe specifically the preferential treatment to convey its relevance.  For example, if an adviser provides an investor with lower fee terms in exchange for a significantly higher capital contribution than paid by other investors, the SEC does not believe that mere disclosure that some investors pay a lower fee is specific enough.  Instead, the SEC believes an adviser must describe the lower fee terms, including the applicable rate (or range of rates if multiple investors pay such lower fees), in order to provide specific information as required by the proposed rule. To comply with this proposed rule, an adviser could provide copies of side letters (with identifying information regarding the other investors redacted) or provide a written summary that specifically describes the preferential treatment. For prospective investors, this disclosure must be provided, in writing, prior to the investor’s investment, and for existing investors, the adviser would have to distribute the notice annually if any preferential treatment is provided to an investor since the last notice.



Andrew Rosell | 817.420.8261 |

Gavin Fearey | 817.420.8276 |

Jarrod Azopardi | 817.420.8241 |


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