The SEC decided yesterday to adopt significant rules and amendments under the Investment Advisers Act of 1940 (“Advisers Act”) relating to private fund advisers. Certain rules and amendments apply to all private fund advisers while others only apply to private fund advisers registered with the SEC. Additionally, the SEC made certain amendments that require all investment advisers (including those that do not advise private funds) to document in writing the annual review of their compliance policies and procedures.
SEC Registered Private Fund Advisors
Quarterly Statements
- SEC-registered private fund advisors will be required to provide quarterly statements to investors. These statements will have to disclose information at the fund-level regarding performance, the cost of investing in the fund, fees and expenses paid by the fund, as well as certain compensation and other amounts paid to the advisor.
Private Fund Audits
- Private funds will have to undergo a financial statement audit that meets the requirements of the audit provision in the custody rule of the Advisers Act custody rule (Rule 206(4)-2).
Adviser Led Secondaries
- A registered private fund advisor will have to obtain a fairness opinion or a valuation opinion when offering existing fund investors the option between selling their interests in a fund and converting or exchanging their interests in the private fund for interests in another vehicle advised by the advisor or any of its related persons.
Books and Records
- Amendments requiring certain additional books and records be maintained by the private fund advisor.
All Private Fund Advisors (Including ERAs)
Restricted Activities
- Advisors may not charge or allocate to the private fund fees or expenses associated with an investigation of the adviser without disclosure and consent from fund investors.
- Regulatory, examination, or compliance fees or expenses of the advisor may not be charged to a private fund unless such fees and expenses are disclosed to investors.
- Advisors may not reduce the amount of an advisor clawback by the amount of certain taxes unless the advisor discloses the pre-tax and post-tax amount of the clawback to investors.
- Advisors may not charge or allocate fees or expenses related to a portfolio investment on a non-pro rata basis, unless the allocation approach is fair and equitable and the advisor distributes advance written notice of the non-pro rata charge and a description of how the allocation approach is fair and equitable under the circumstances
- Advisors may not borrow or receive an extension of credit from a private fund client without disclosure to, and consent from, fund investors.
Preferential Treatment
- All advisors will be prohibited from providing preferential terms to investors regarding: a) certain redemptions from the fund, unless the ability to redeem is required by applicable law or the advisor offers the preferential redemption rights to all other investors without qualification; and b) certain preferential information about portfolio holdings or exposures, unless such preferential information is offered to all investors.
- Advisors will also be prohibited from providing preferential treatment to investors, unless certain terms are disclosed in advance of an investor’s investment in the private fund and all terms are disclosed after the investor’s investment.
Legacy Status
- The SEC is providing legacy status for the prohibitions aspect of the Preferential Treatment Rule and the aspects of the Restricted Activities Rule that require investor consent. The legacy status provisions apply to governing agreements that were entered into prior to the compliance date if the applicable rule would require the parties to amend the agreements.
Compliance Dates
- The Private Fund Audit Rule and the Quarterly Statement Rule will have a compliance date 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: for advisers with $1.5 billion or more in private funds assets under management, 12 months after the date of publication in the Federal Register; and for advisers with less than $1.5 billion in private funds assets under management, 18 months after the date of publication in the Federal Register.
- Compliance with the amended Advisers Act rule regarding documentation of the annual compliance review will be required 60 days after publication in the Federal Register.
To view the final rule adopted by the SEC, click here.
For more information about these rule changes, please contact NCA Compliance.Hayley Nelson is the President and Principal Consultant of NCA Compliance, Inc., a compliance consulting firm providing a wide range of customized compliance solutions for investment advisors. Ms. Nelson previously worked for the Securities and Exchange Commission and a large investment manager in New York.
