On February 9, 2022, the U.S. Securities and Exchange Commission (SEC) held an open meeting where it proposed new rules and amendments under the Investment Advisers Act of 1940 to increase the regulation of private fund advisers. The new rules could result in significant changes in fund manager compliance practices and lead to a heightened level of transparency for investors. The proposed rules would:
- Require private fund advisers registered with the Commission to provide investors with quarterly statements detailing information about private fund performance and fees;
- Require registered private fund advisers to cause the private funds they advise to undergo a financial statement audit at least annually and upon liquidation;
- 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 including:
- Charging certain fees and expenses to a private fund or its portfolio investments, such as fees for unperformed services (e.g., accelerated monitoring fees) and fees associated with an examination or investigation of the adviser;
- Seeking reimbursement, indemnification, exculpation, or limitation of its liability for certain activity;
- Reducing the amount of an adviser clawback by the amount of certain taxes;
- Charging fees or expenses related to a portfolio investment on a non-pro rata basis; and
- Borrowing or receiving an extension of credit from a private fund client.
- Prohibit all private fund advisers from providing certain types of better redemption or information terms to certain investors, while also prohibiting all other types of preferential treatment unless disclosed to current and prospective investors;
- Require a fairness opinion in connection with an adviser-led secondary transaction; and
- Require all registered advisers, including those that do not advise private funds, to document the annual review of their compliance policies and procedures in writing.
Additionally, the proposal would require advisers to retain records related to these proposed rules and facilitate the SEC’s ability to assess an adviser’s compliance with the rules.
For more information on the proposed rules or their impact, contact a member of Hirschler’s Investment Management Practice Group.