In February 2022, the Securities and Exchange Commission (the “SEC”) announced proposed new rules and amendments under the Investment Advisers Act of 1940 (“Advisers Act”). These proposed rules would significantly increase the regulation of private fund advisers, even those not registered with the SEC. The SEC indicated the proposed rules were intended to increase transparency for private fund investors and to prohibit certain activities that have the potential to lead to investor harm.

Proposed Prohibitions on Adviser Activities 

One of the proposed rules would prohibit all private fund advisers (whether or not they are registered with the SEC) from engaging in certain activities, including:

  • charging fees for unperformed services and fees associated with an examination or investigation of the adviser;
  • seeking reimbursement or indemnification of liability for certain activities;
  • reducing an adviser’s clawback by the amount of certain taxes;
  • charging fees or expenses on a non-pro-rata basis; and
  • borrowing funds from a private fund client.

The SEC identified these activities as involving conflicts of interest for the adviser that could lead the adviser to place its interests ahead of the private fund’s interests.

In addition, all private fund advisers (whether or not they are registered with the SEC) would be prohibited from providing preferential treatment to certain investors. Under this proposed rule, an adviser could not allow certain investors to redeem their investment while restricting others and could not provide information about portfolio holdings or exposure to some investors but not others. Other types of preferential treatment would still be allowed, but would have to be disclosed to current and prospective investors.

Increased Transparency and Reporting Requirements for Registered Private Fund Advisers 

The proposed rules would require registered private fund advisers to distribute quarterly statements to private fund investors that details (i) fees and expenses paid by the fund during that period, (ii) compensation paid to the adviser or related parties, and (iii) information on the fund’s performance, including specifics for liquid and illiquid funds to give investors a better picture of performance.  

Registered private fund advisers would also have to subject each private fund to an annual audit and an audit at liquidation. The audited financial statements would be required to be distributed to investors after completion of the audit. This rule is intended to provide a check on the adviser’s valuation of the fund’s assets to ensure investors understand their investment and the fees being paid to the adviser.

Finally, the proposed rules would require a registered private fund adviser to obtain a fairness opinion in connection with an adviser-led secondary transaction. When an adviser offers investors of an existing fund the opportunity to sell or trade their interest in the existing fund for an interest in another investment vehicle advised by the same adviser, the adviser would have to engage an independent opinion provider to provide a fairness opinion on the price being offered in the transaction, similar to those more typically used in the M&A context.

Increased Recordkeeping

Along with the proposed rules for private fund advisers, the SEC is proposing that all registered advisers (whether or not they advise private funds) document their annual compliance review in writing. 

Next Steps

The proposed amendments are summarized in the SEC’s Fact Sheet. The deadline for public comment on the proposed rule changes is April 25, 2022.

We will monitor this proposal and provide updates as appropriate. Meanwhile, if you have any questions about this proposal, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets group at (585) 232-6500 or (716) 853-1616.


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