August 24, 2023

Private Equity: SEC Adopts Private Fund Adviser Rules

Yesterday, the SEC announced the adoption of new rules and amendments intended to tighten the regulation of private fund advisers.  Here’s the whopping 660-page adopting release and here’s the 3-page Fact Sheet.  This excerpt from the Fact Sheet provides a summary of the new rules:

The new rules require private fund advisers registered with the Commission to:

– Provide investors with quarterly statements detailing information regarding private fund performance, fees, and expenses;

– Obtain an annual audit for each private fund; and

– Obtain a fairness opinion or valuation opinion in connection with an adviser-led secondary transaction.

The new rules require that all private fund advisers:

– Prohibit engaging in certain activities and practices that are contrary to the public interest and the protection of investors unless they provide certain disclosures to investors, and in some cases, receive investor consent; and

– Prohibit providing certain types of preferential treatment that have a material negative effect on other investors and prohibit other types of preferential treatment unless disclosed to current and prospective investors.

Additionally, the amendments will require all registered advisers, including those that do not advise private funds, to document in writing the annual review of their compliance policies and procedures.

Media reports note that in many areas, the final rules represent a significant retrenchment from the scope of the original proposal.  Yesterday’s Axios Pro Rata newsletter provided this summary of the ways in which the rules were pared back from the original proposal:

– A “prohibited activities rule” has become a “restricted activities rule,” with many of the underlying actions now allowed so long as there is investor disclosure. For example, the ban on “fees for unperformed services” like accelerated monitoring fees is gone, although an SEC official insists that’s because staff determined they were already prohibited under other statute.

– Funds still will be allowed to charge LPs for fees tied to regulatory or compliance issues, so long as it’s disclosed. They even can charge fees on a non pro rata basis, so long as it describes to LPs why it believes such a move is fair and equitable. The only exception is for fees tied to an SEC investigation.

– Disclosure also is the buzzword for a clause that would have stopped GPs from reducing clawbacks by the amount of actual or expected taxes. So long as LPs are informed, it’s allowed.

– There was no change made to private fund liability rules, which would have made it much easier for LPs to sue GPs.

Compliance dates for the new rules vary. For the rules requiring private fund audits and quarterly statements, the compliance date will be 18 months after the date of publication in the Federal Register. The rules requiring fairness or valuation opinions on adviser-led secondaries, the rules restricting preferential treatment and the restricted activities rules for advisers with more than $1.5 billion in private fund assets under management will go into effect 12 months after that date. Advisers with less than $1.5 billion in such assets will have an additional six months after the publication date to comply. Compliance with the amended rules on documentation of compliance reviews will be required 60 days after publication in the Federal Register.

John Jenkins