SEC Proposes Reforms for Private Funds

February 21, 2022

WHAT HAPPENED?

On February 9, 2022, the United States Securities and Exchange Commission voted to propose new rules and amendments to enhance the regulation of private fund advisers and protect investors in private funds by increasing transparency. The proposed rules would require private fund advisers to provide quarterly statements and additional disclosures to investors and would create new requirements for:

• fund audits;
• books and records; and,
• adviser-led secondary transactions.

Additionally, the proposed rule would require all registered advisers, whether they advise private funds or not, to document an annual review of the compliance policies and procedures in writing.
This proposal comes on the heels of proposed changes to Form PF and the second-ever risk alert for private fund advisers. Thereby, continuing the trend of increased regulatory attention to private capital.

KEY TAKEAWAYS

Under the proposed rules and amendments:

• Quarterly Statement Rule – Private fund advisers would be required to distribute quarterly statements to investors that includes a detailed accounting of all fees and expenses charged to the fund, information regarding compensation paid to the adviser or any of its related persons, and other prescribed performance information.
• Private Fund Audit Rule – Private funds would be required to have a financial statement audit annually and upon liquidation. The audited financials will be required to be distributed promptly to investors after completion of the audit.
• Adviser-Led Secondaries Rule – Private fund advisers would be required to obtain a fairness opinion in connection with an adviser-led secondary transaction from an independent opinion provider. The adviser will also be required to prepare and distribute to investors a summary of any material business relationships the independent opinion provider has had with the adviser or any of its related persons, within the past two years. The goal is to provide a check against an adviser’s conflicts of interest in structuring and leading such transactions.
• Prohibited Activities Rule – The proposal would prohibit the following activities by private fund advisers:
  • Charging certain fees, such as for unperformed services (e.g., accelerated monitoring fees) or regulatory examinations of the adviser;
  • Seeking reimbursement, indemnification, exculpation or limitation of liability for certain activities;
  • Reducing the amount of an adviser clawback by the amount of certain taxes;
  • Charging fees or expenses related to a portfolio investment on a non-pro rata basis; and
  • Borrowing or receiving an extension of credit from a private fund client.
• Preferential Treatment Rule – Private fund advisers would be prohibited from giving preferential terms to certain investors on redemptions or information about portfolio holdings or exposures. All other types of preferential treatment would be prohibited unless disclosed to current and prospective investors
• Amendment to the Compliance Rule – ALL Advisers, not just those advising private funds, would be required to document their annual review in writing. While the current rule does not stipulate that the annual review must be in writing, the SEC’s expectation during examinations is that the adviser produce a written report evidencing its annual review of the compliance program.

WHAT DOES THIS MEAN FOR ME?

If you advise private funds these changes could affect your current disclosures, fee billing practices, and activities with investors.  For all advisers, this proposal would mean a new requirement to document, in writing, the annual compliance review including the review of compliance policies and procedures.

The proposed amendments have a 60 day public comment period for those wishing to provide input to the SEC.

Fairview will continue to update you with the latest news on these proposals and other regulatory changes.  If you have questions about how these proposed rules and amendments could affect your private funds or firm, Fairview can help.  Contact us today with inquiries about compliance for registered investment advisers, including those that manage private funds.