On August 23, 2023, the Securities and Exchange Commission (SEC) adopted new rules and rule amendments to enhance the regulation of private fund advisers and update the existing compliance rule that applies to all investment advisers. The new rules and amendments are designed to protect private fund investors by increasing transparency, competition, and efficiency in the private funds market.
To enhance transparency, the final rules will require private fund advisers registered with the SEC to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance. In addition, the final rules will require a private fund adviser registered with the Commission to obtain and distribute to investors an annual financial statement audit of each private fund it advises and, in connection with an adviser-led secondary transaction, a fairness opinion or valuation opinion.
To better protect investors, the final rules will prohibit all private fund advisers from providing investors with preferential treatment regarding redemptions and information if such treatment would have a material, negative effect on other investors. In all other cases of preferential treatment, the SEC adopted a disclosure-based exception to the proposed prohibition, including a requirement to provide certain specified disclosure regarding preferential terms to all current and prospective investors.
In addition, the final rules will restrict certain other private fund adviser activity that is contrary to the public interest and the protection of investors. Advisers generally will not be prohibited from engaging in certain restricted activities, so long as they provide appropriate specified disclosure and, in some cases, obtain investor consent. The final rules, however, will not permit an adviser to charge or allocate to the private fund certain investigation costs where there is a sanction for a violation of the Investment Advisers Act of 1940 or its rules.
To avoid requiring advisers and investors to renegotiate governing agreements for existing funds, the SEC adopted legacy status provisions applicable to certain of the restricted activities and preferential treatment provisions. Such legacy status will apply to those governing agreements entered into in writing prior to the compliance date and with respect to funds that have commenced operations as of the compliance date.
PESP wrote in support of the rule proposal in April 2022, writing that these additional disclosures will (1) provide investors with a clearer picture on how their investments are being managed (with such investments largely being funded by public sector workers), (2) prevent disparate treatment of investors, and (3) rein in unnecessary fees that are costing investors and portfolio companies millions of dollars annually.
Although this rule is supported by institutional limited partners, trade associations representing asset managers have aligned themselves against the SEC, and have even filed a lawsuit. The September 1, 2023 lawsuit filed by the Managed Funds Association, National Venture Capital Association, American Investment Council, Alternative Investment Management Association, National Association of Private Fund Managers and the Loan Syndications & Trading Association alleges that “[t]he rules exceed the Commission’s statutory authority, were adopted without compliance with notice-and-comment requirements, and are otherwise arbitrary, capricious, an abuse of discretion, and contrary to law, all in violation of the Administrative Procedure Act.” Republican lawmakers have also criticized the SEC’s final rule.
Please read PESP’s April 2022 comment letter here. If you have any questions about the SEC’s final rule regarding private funds, please contact PESP’s Policy Director, Chris Noble, at email@example.com.