On August 23, 2023, the US Securities and Exchange Commission (SEC) adopted new rules and amendments to the Investment Advisers Act of 1940 (the “Advisers Act”) affecting private fund advisers. Under the new rules, all private fund advisers – regardless of registration status – will be prohibited from:
- Charging fees and expenses related to regulatory investigations, proceedings, or compliance without disclosure and consent from investors.
- Charging any fees related to sanctions of the private fund adviser in connection with a breach of the Advisers Act.
- Reducing the amount of an adviser clawback by taxes without disclosure of pre-tax and post-tax clawback calculation.
- Charging fees related to a portfolio investment on a non-pro rata basis, with certain exceptions.
- Direct or indirect borrowing by the adviser from a private fund client without disclosure and consent from the investors.
Additionally, under the reforms, all private fund advisers will be prohibited from providing certain types of preferential treatment to particular investors, including:
- Rights that modify the fees paid by particular investors without disclosure to all current and prospective investors.
- Redemption rights, unless all investors are provided the opportunity to elect such redemption rights.
- Additional information rights, unless all investors are provided the opportunity to elect such information rights.
The reforms also will require private fund advisers registered with the SEC to:
- Provide investors with quarterly statements detailing information regarding private fund performance, as well as fees and expenses charged to the private fund.
- Obtain an annual audit for each private fund.
- Acquire a fairness or valuation opinion in connection with an adviser-led secondary transaction.
Further, the reforms include amendments to the compliance rule for all registered investment advisers that require the adviser to document in writing the mandated annual review of their compliance policies and procedures. The SEC expects to use these reports to facilitate its assessment of registered investment advisers’ compliance.
The SEC has included provisions to excuse the application of certain of the new prohibitions with respect to the preferential treatment rule and the restricted activities rule from preexisting private fund governing agreements entered into prior to the applicable compliance date.
The adopted rule is different than the proposed rule in many respects, including the elimination of proposed limitations on indemnification and portfolio fees for services not performed (e.g., accelerated monitoring fees).
The reforms will become effective 60 days after publication in the Federal Register and provide for a transition period of 18 months after the publication date for advisers with less than $1.5 billion in private fund assets under management (AUM). Advisers with $1.5 billion or more in private fund AUM will have 18 months after the date of publication to comply with the annual audit and quarterly statement reforms, and 12 months to comply with all other reforms. Compliance with the amended Advisers Act compliance rule will be required 60 days after publication for all registered investment advisers.
We’re performing an in-depth review of the 660-page release and will provide an update with more information soon.