In August 2023, the Securities and Exchange Commission (“SEC”) adopted new rules and amendments under the Investment Advisers Act of 1940 (the “Advisers Act”), as outlined in the SEC’s Fact Sheet. The SEC expects these rules, which impact all private fund advisers (not only registered advisers), to enhance investor protection by increasing visibility, reducing conflicts of interest, and promoting stronger governance structures in private funds. The new rules increase the disclosure obligations of private fund advisers to reduce conflicts of interest between the adviser and investors.
Rules Applicable to All Private Fund Advisers
Restricted Activities
All private fund advisers will be restricted from engaging in activities that are contrary to the public interest and the protection of investors. Unless the private fund adviser provides disclosure to investors, it may not:
- charge the investors for fees or expenses related to regulatory, examination or compliance matters;
- reduce the amount of adviser clawback by the amount of taxes incurred; or
- charge fees and expenses to a portfolio investment on a basis other than pro rata.
Unless the private fund adviser provides disclosure to investors and has received consent from the investors, it may not:
- charge the investors for fees or expenses related to an investigation of the adviser; or
- receive an extension of credit from a private fund client.
Preferential Treatment
All private fund advisers cannot provide preferential terms to some investors over others. In particular, a private fund adviser cannot:
- provide preferential redemption terms to some investors unless provided to all other investors without qualification; or
- share information about portfolio holdings or exposures unless offered to all other investors.
If a private fund adviser provides any preferential treatment to investors, it must disclose that treatment in advance and ensure that all terms are disclosed after the investors’ investment.
Legacy Status
Governing agreements entered into before the date a private fund adviser must comply with the Restricted Activities and Preferential Treatment rules will be given legacy status by the SEC if the terms of these agreements would have to be changed to comply with the new rules. This means that a private fund adviser will not have to redo existing governance documents to meet these compliance standards. However, private fund advisers should ensure they are prepared to enter into compliant arrangements after the effective date of these new rules.
Rules Applicable to Registered Private Fund Advisers
Under the new rules, registered private fund advisers will be required to provide more information to investors. In particular:
- Annually: Undergo a financial statement audit (“Audit Rule”);
- Quarterly: Provide a quarterly statement to investors disclosing the fund’s performance, the costs of investing, fees and expenses paid by the fund, and amounts paid to the adviser (“Quarterly Statement Rule”); and
- Before any Secondaries: If offering existing investors the choice between selling their interests or converting into a new vehicle, obtain a fairness opinion or valuation opinion (“Adviser-Led Secondaries Rule”).
The amendments to the Advisers Act amend the books and records rule (“Books and Records Rule”) to facilitate the SEC’s ability to ensure compliance with these rules.
Rule Applicable to All Registered Advisers
The Advisers Act amendments also require registered advisers, including those that do not advise private funds, to document, in writing, the required annual review of their compliance policies and procedures (“Compliance Rule”).
Compliance Dates
| Date | Type of Adviser | Applicable AUM Range | Rule |
| November 13, 2023 | Registered | Any size | Books and RecordsCompliance |
| September 14, 2024 | Registered | Fund with AUM ≥ $1.5 billion | Adviser-Led Secondaries |
| All | Fund with AUM ≥ $1.5 billion | Restricted ActivitiesPreferential Treatment | |
| March 14, 2025 | Registered | Any size | Quarterly StatementAudit |
| Registered | Fund with AUM < $1.5 billion | Adviser-Led Secondaries | |
| All | Fund with AUM < $1.5 billion | Restricted ActivitiesPreferential Treatment |
Next Steps
If you have any questions about implementing these new rules and amendments in your business, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets group.