News & Insights

Divided SEC Adopts Private Fund Adviser Reforms

What happened?

On August 23, 2023, a divided SEC voted to adopt enhanced regulations of private fund advisers and to update the Compliance Rule for all investment advisers. “By enhancing advisers’ transparency and integrity, we will help promote greater competition and thereby efficiency. Consistent with our mission and Congressional mandate, we advance today’s rules on behalf of all investors — big or small, institutional or retail, sophisticated or not,” said SEC Chair Gary Gensler, according to the Commission’s press release. The new rules for registered private fund advisers include providing quarterly statements to fund investors; completing annual audit requirements for each private fund; and a requirement for adviser-led secondary transactions to obtain a fairness opinion or valuation opinion in connection with the transaction. A number of prohibitions for all private fund advisers, which created controversy when first proposed, have been adopted with some softening.

For Registered Private Fund Advisers:

Quarterly Statement Rule – Registered private fund advisers are required to distribute a quarterly statement to private fund investors disclosing fund-level performance information, the cost of investing in the fund, fees and expenses paid by the fund, and certain compensation and other amounts paid to the adviser.

Private Fund Audit Rule – Registered private fund advisers are required to obtain a financial statement audit that meets the requirements of the audit provision in the Advisers Act custody rule (rule 206(4)-2)) for the private funds they advise.

Adviser-Led Secondaries Rule – Registered private fund advisers must obtain a fairness opinion or a valuation opinion when offering existing fund investors the option between selling their interests in a private fund and converting or exchanging their interests in the private fund for interests in another vehicle advised by the adviser or any of its related persons. The rule also requires the adviser to prepare and distribute to investors a summary of any material business relationships the adviser has, or has had within the prior two years, with the independent opinion provider. The aim is for this requirement to be a check on conflicts of interest in structuring and leading such transactions.

Books and Records Rule Amendments – The reforms include amendments to the books and records rule under the Advisers Act to aid the SEC in assessing compliance with these new rules.

For All Private Fund Advisers:

Restricted Activities Rule – The reforms include a new rule that restricts all private fund advisers from engaging in the following activities that are viewed as contrary to the public interest and the protection of investors:

  • Charging or allocating to the private fund fees or expenses:
    • from investigations of the adviser without disclosure and consent from investors;
    • from investigations that result or have resulted in a sanction for violation of the Advisers Act;
    • of the adviser for regulatory, examination, or compliance fees or expenses, unless such fees and expenses are disclosed to investors;
  • Reducing the amount of an adviser clawback by the amount of certain taxes, unless the adviser discloses the pre-tax and post-tax amount of the clawback to investors;
  • Charging or allocating fees or expenses related to a portfolio investment on a non-pro rata basis, unless the allocation is fair and equitable and the adviser 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; and
  • Borrowing or receiving an extension of credit from a private fund client without disclosure to, and consent from, fund investors.

Preferential Treatment Rule – All private fund advisers are prohibited from providing preferential terms to investors regarding:

  • certain redemptions from the fund, unless the ability to redeem is required by applicable law or the adviser offers the preferential redemption rights to all other investors without qualification; and
  • certain preferential information about portfolio holdings or exposures, unless such preferential information is offered to all investors.

This also includes a prohibition from providing preferential treatment to investors, unless certain terms are disclosed in advance of an investor’s investment in the fund and that all terms are disclosed after an investor’s investment.

Legacy Status – The prohibitions of the Preferential Treatment Rule and the Restricted Activities Rule that require investor consent will not affect all private funds. Legacy status provisions apply to governing agreements entered into before the compliance date if the applicable rule would require the parties to amend the agreements.

Additionally, securitized asset funds are excluded from the definition of private funds for the purposes of the Quarterly Statement Rule, Private Fund Audit Rule, Adviser-Led Secondaries Rule, Restricted Activities Rule, and Preferential Treatment Rule.

For All Registered Advisers:

Compliance Rule Amendments – The reforms include amendments to the Compliance Rule under the Advisers Act requiring all registered advisers, including those that do not advise private funds, to document in writing the required annual review of their compliance policies and procedures.


  • For the Quarterly Statement Rule and Private Fund Audit Rule, the compliance date will be 18 months after publication in the Federal Register.
  • A staggered transition for the Adviser-Led Secondaries Rule, the Preferential Treatment Rule, and the Restricted Activities Rule allows for 18 months for advisers with less than $1.5 billion in private fund assets but only 12 months for advisers with $1.5 billion or more in private fund assets.
  • For the amendment to the Compliance Rule requiring written annual review documentation, the compliance date will be 60 days after publication in the Federal Register.

Update: On September 14, the Private Fund Adviser Rules were published in the Federal Register.

Click here to view the full list of compliance dates.

What does this mean for me?

While we may see a legal challenge to these reforms, preparation is still needed. These reforms passed with a 3-2 vote and strong dissents. The softening of out-right prohibitions to restricted activities that are allowed with required disclosures may not be enough of an olive branch to advisers. At the same time, these reforms are in keeping with the SEC’s trend of increased regulatory attention to private funds, and the SEC’s quick pace of new rulemaking. On the same day the vote passed the SEC reopened the comment period for the Enhanced Safeguarding Rule that would redesignate and amend the Custody Rule. This grants 60 more days for public comment on another significant proposed rule.

An 18-month transition gives plenty of time to prepare. Like we saw with the transition period for the Marketing Rule, firms that make use of that time are ready when the compliance date arrives.

Contact us if you have any questions or would like additional information about maintaining your compliance program.