SEC Adopts Significant Amendments to the Private Fund Rules

On August 23, 2023, the Securities and Exchange Commission (the“SEC”) voted 3-2 to adopt new rules and amendments (the “Rules”) for private fund advisers (the “Advisers”) under the Investment Advisers Act of 1940 (read the announcement here). The new Rules, although significantly scaled back from the originally proposed rules in February 2022, will have a profound impact on both Registered Investment Advisers and Exempt Reporting Advisers.

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The Rules require Advisers registered with the SEC to:

• Provide investors with quarterly statements detailing information regarding private fund performance, fees, and expenses:
• Obtain an annual audit for each fund; and
• Obtain a fairness opinion in connection with an adviser-led secondary transaction.

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The Rules that affect all Advisers, including Exempt Reporting Advisers:

• Require them to provide documentation in writing the annual review of their compliance policies and procedures;
• Prohibit from engaging in certain activities 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 from providing certain types of preferential treatment that have a material negative effect on other investors.

‍Key Takeaways

Although significant, the new Rules did not contain some of the most controversial provisions that were originally proposed in February 2022. A summary comparing the original proposed Rule to the final Rule is provided below.

What is important to note is that the SEC is offering legacy status for the prohibitions aspect of the Preferential Treatment Rule and aspects of the Restricted Activities Rule that require investor consent. Legacy status provisions apply to agreements that were entered into prior to the compliance date.  

Given the enormity of the final Rules and the impact it will have on Advisers, it is imperative that Advisers and Chief Compliance Officers review the Rules and begin putting a plan in place for compliance.

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How private fund advisers should prepare:

 The SEC has provided a staggered schedule for when Advisers must comply with certain Rules:

• For the Quarterly Statement and Private Fund Audit Rules, the compliance data will be 18 months after the date of publication in the Federal Register.
• For the Adviser-Led Secondaries Rule, the Preferential Treatment Rule, and the Restricted Activities Rule, the compliance dates are:
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  o   For Advisers with $1.5 billion or more in private fund assets under management, 12 months after the date of publication in the Federal Register; and
  o   For Advisers with less than $1.5 billion in private fund assets under management, 18 months after the date of publication in the Federal Register.
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• Compliance with the amended Advisers Act compliance rule will be required 60 days after publication in the Federal Register.
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As the compliance date approaches, private equity fund advisers should consider taking the following steps:

• Assess how the final Rules will impact your firm’s procedures and reporting obligations;
• Establish strong controls to ensure your firm has processes in place to comply with the new Rules; and  
• Review and update your firm’s policies and procedures to ensure compliance with the new reporting requirements.

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How Petra can help

Petra Funds Group’s compliance team has decades of experience managing SEC regulatory compliance programs for private fund advisers. The group’s expertise enables them to provide insight and guidance on a wide range of regulatory compliance services, from investment adviser registration to ongoing compliance support to performing SEC mock examinations. Learn more about Petra’s comprehensive compliance offering here.

Please get in touch with a member of Petra's compliance team with any questions you have about the SEC Final Private Funds Adviser Rules or other regulatory compliance matters.

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