The rules at a glance
The SEC’s new private fund adviser requirements are spelled out in detail in the final rule. An SEC fact sheet and implementation guidance summarize the requirements.1
In brief, the new rules fall into three categories:
Requirements that apply to SEC-registered private fund advisers
- Quarterly statements. Registered private fund advisers must provide investors with quarterly statements regarding fund performance, costs, fees, expenses, and compensation.
- Annual audits. All private funds are required to undergo an annual GAAP-compliant financial statement audit that must be completed within 120 days of the fund’s fiscal year-end.
- Adviser-led secondaries. Registered private fund advisers must obtain a fairness or valuation opinion when they offer existing investors the option of either selling their interests or exchanging them into another fund advised by the adviser or a related party.
- Books and records. The act updates existing books and records rules to include new requirements.
Requirements that apply to all private fund advisers, including nonregistrants
- Restricted activities. The new rules prohibit all fund advisers from charging the fund for certain regulatory or compliance expenses without investor consent. It also prohibits certain other adviser activities related to fee allocations, clawbacks for tax purposes, and loans from the fund or clients.
- Preferential treatment. Advisers cannot give investors preferential information, redemption rights, or other preferential treatment that could have a material negative effect on other investors.
Requirement that applies to all SEC-registered advisers
- Compliance documentation. All SEC-registered advisers, including those that do not advise private funds, are now required to document in writing the required annual review of their compliance policies and procedures.
The compliance deadlines for the new rules vary. Some of the review and documentation requirements are already in effect. Other reporting, audit, and operational requirements must be met by late 2024 or early 2025, depending on the size of the fund.
In addition, certain rules may be grandfathered in for some previously established funds. For example, the prohibition against an adviser borrowing from a fund does not apply if such loans were part of the fund’s partnership or subscription agreements. The same exemption applies to certain preferential redemption rights that were included in the original fund documentation.
Nevertheless, even if their funds are exempt from certain requirements, fund managers could find another incentive for compliance, as potential investors start factoring compliance with the new disclosure, audit, and operational requirements into their investment decisions.