February 10, 2022

Private Equity: SEC Proposes to Overhaul Private Fund Adviser Rules

Yesterday, the SEC announced proposed amendments to 1940 Act rules governing private fund advisers. Here’s the 341-page proposing release and the more digestible two-page fact sheet.  According to this excerpt from the fact sheet, the proposed rules would:

– Require private fund advisers registered with the Commission to provide investors with quarterly statements detailing information about private fund performance, fees, and expenses;

– Require registered private fund advisers to obtain an annual audit for each private fund and cause the private fund’s auditor to notify the SEC upon certain events;

– Require registered private fund advisers, in connection with an adviser-led secondary transaction, to distribute to investors a fairness opinion and a written summary of certain material business relationships between the adviser and the opinion provider;

– Prohibit all private fund advisers, including those that are not registered, from engaging in certain activities and practices that are contrary to the public interest and the protection of investors; and

– Prohibit all private fund advisers from providing certain types of preferential treatment that have a material negative effect on other investors, while also prohibiting all other types of preferential treatment unless disclosed to current and prospective investors.

The proposed rule would also require all registered advisers to document the annual review of their compliance policies and procedures in writing.

One aspect of the proposed amendments that’s certain to draw plenty of attention is the SEC’s proposal to prohibit certain types of preferential treatment for selected investors. All private fund advisers would be prohibited from providing preferential terms to favored investors on fund redemptions or information on portfolio holdings or exposures that isn’t provided to all investors. While side letters on other investment terms would continue to be permitted, any preferential treatment provided under the terms of those arrangements would have to be disclosed to current and prospective investors.

Comments on the proposal are due by the later of 30 days after the date that it’s published in the Federal Register or April 11,2022. We’ll be posting memos in our “Private Equity” Practice Area.

John Jenkins