The U.S. Securities and Exchange Commission (SEC) has adopted new rules and rule amendments to enhance the regulation of private fund advisers.
It will also update the existing compliance rule that applies to all investment advisers.
The new rules and amendments are designed to protect private fund investors by increasing transparency, competition and efficiency in the private funds market.
To enhance transparency, the final rules will require private fund advisers registered with the Commission to provide investors with quarterly statements detailing certain information regarding fund fees, expenses and performance.
In addition, the final rules will require a private fund adviser registered with the Commission to obtain and distribute an annual financial statement audit of each private fund it advises to investors. A fairness opinion or valuation opinion will also be needed when considering an adviser-led secondary transaction.
To protect investors, the final rules will prohibit all private fund advisers from providing investors with preferential treatment regarding redemptions and information if such treatment would have a material, negative effect on other investors.
In all other cases of preferential treatment, the Commission adopted a disclosure-based exception to the proposed prohibition, including a requirement to provide certain specified disclosure regarding preferential terms to all current and prospective investors.
In addition, the final rules will restrict certain other private fund adviser activity that is contrary to the public interest and the protection of investors. Advisers generally will not be prohibited from engaging in certain restricted activities, providing they offer appropriate disclosure and, in some cases, obtain investor consent.
The final rules, however, will not permit an adviser to charge or allocate investigation costs to the private fund certain where there is a sanction for a violation of the Investment Advisers Act of 1940 or its rules.
To avoid requiring advisers and investors to renegotiate governing agreements for existing funds, the Commission adopted legacy status provisions applicable to some of the restricted activities and preferential treatment provisions.
Gary Gensler, chair of the SEC, says: “Private funds and their advisers play an important role in nearly every sector of the capital markets. 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.”
Commenting on SEC’s rulemaking, Jack Inglis, CEO of the Alternative Investment Management Association (AIMA), says: “AIMA welcomes many of the Commission’s revisions of the original Private Fund Adviser Rule proposal. The February 2022 proposal contained a number of terms that would have stifled innovation, imposed disproportionate burdens on private fund market participants, and hindered the industry's ability to deliver value to investors in a manner that balances risks and rewards in the ways investors are seeking.
He adds: “We note that the final version of the rules reflects many of the concerns raised by AIMA and other industry stakeholders. However, the rules adopted today still contain several areas of concern for AIMA and our global membership, which includes fund managers and investors of all sizes, and the final text will need to be examined in detail to identify where these remain.
“AIMA is reviewing these revisions and will seek clarification from the SEC on certain aspects. We are assessing the full impact that these rules will have on our members and will be discussing our options with AIMA’s governing board.”
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