Published on Aug 24th, 2023 |

SEC Adopts Private Fund Rules

SEC Releases

Brief Introduction

As recently predicted, the SEC announced on August 23rd its adoption of new rules for Private Funds and Private Fund Advisers.

There are some significant compliance changes due to these rules.

SEC Chairman, Gary Gensler, and Commissioner, Caroline Crenshaw, both provided supporting comments for this decision.

New Rules for Registered Fund Advisers

New Rules for Registered Fund Advisers

  1. Quarterly statements must be distributed to Private Fund investors that must disclose:
    • Fund-level information regarding performance
    • The cost of investing in the private fund
    • Fees and expenses paid by the private fund
    • Compensation and other amounts paid to the adviser
  2. Advised Private Funds must undergo a financial statement audit meeting the audit provision requirements in the Adviser Act Custody Rule.
  3. Private Fund Advisers must obtain a fairness opinion or a valuation opinion when offering existing fund investors the option between selling interests and converting/exchanging their interests in the Private Fund for another vehicle.
    • Advisers must also prepare and distribute to investors a summary of any material business relationships the adviser has (or has had in the past 2 years) with the independent opinion provider.
  4. Certain amendments to the Books and Records Rule under the Advisers Act will allow for the SEC to assess adviser compliance with the other rules.

New Rules for All Private Fund Advisers

New Rules for All Private Fund Advisers

  1. These following activities will be restricted:
    • Charging or allocating fees or expenses associated with investigations of the adviser without disclosure and consent from fund investors.
    • Charging or allocating fees or expenses associated from an imposed sanction for violations of the Advisers Act.
    • Charging the fund regulatory, examination, or compliance fees/expenses without disclosing the fees to investors.
    • Reducing adviser clawback for certain taxes, unless pre-tax and post-tax amounts are disclosed to investors.
    • Charging or allocating fees on a non-pro rata basis without the allocation being fair and equitable, and without distributing advance written notice of the non-pro rata charge with disclosure of how the charges are fair and equitable.
    • Borrowing or receiving an extension of credit from a Private Fund client without disclosure and consent from investors.
  2. Private Fund Advisers are prohibited from giving preferential treatment to investors regarding:
    • Certain redemption rights unless the ability is required by law and offered to all other investors.
    • Information about portfolio holdings or exposures without offering this information to all investors.
    • Any treatment that is not disclosed prior to and after the investment in the Private Fund.

For All Registered Investment Advisers ("RIAs")

For All Registered Investment Advisers (“RIAs”)

  • All RIAs must document their annual review of their compliance policies and procedures.

Compliance Dates

Compliance Dates

  • There is a legacy status provided for Private Funds, to prevent a need for renegotiation, regarding the prohibitions in the Preferential Treatment Rule and the Restricted Activities Rule.
  • For the Private Fund Audit Rule and Quarterly Statement Rule, the compliance date will be eighteen months after the date of publication in the Federal Register.
  • For the Adviser-Led Secondaries Rule, the Preferential Treatment Rule, and the Restricted activities rule, the compliance dates will be:
    • 12 months for advisers with $1.5 Billion or more in private AUM.
    • 18 months for advisers with less than $1.5 Billion private AUM.

Vigilant's Conclusion

Vigilant’s Conclusion

These rules will have major impacts on the Private Fund industry, as the SEC attempts to standardize the way information is provided to Private Fund investors.

SEC Chairman, Gary Gensler, stated that these new rules will enhance adviser transparency and integrity, providing for greater competition and efficiency in an important marketplace.

Commissioner, Caroline Crenshaw, argued that the term “private fund” is misnomer, and the impact by Private Fund Advisers on all aspects of the market warrants further regulation regardless of the “sophisticated” status of Private Fund investors.

This may take considerable resources, but Vigilant is prepared to support RIAs in whatever capacity they may need when making these adjustments.

It is vital to your Firm’s success that you take a proactive compliance approach and begin preparations now.

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