SEC’s Proposal to Enhance Private Fund Protections


The Securities and Exchange Commission has proposed new rules and amendments under the Investment Advisers Act of 1940 (Advisers Act) to enhance the regulation of private fund advisers and to protect private fund investors increasing transparency, competition, and efficiency. Specifically, the SEC has proposed:

  • Quarterly statement distribution
  • Financial statement audits
  • Distribution of fairness opinions
  • Prohibition of fees
  • The extension of credit, preferential treatment
  • Additional retention of books and records
  • The review of compliance policies and procedures

To provide transparency into these rulings, we’ve broken down the SEC’s proposals, providing clear insight into the expectations and implications of each.

The Quarterly Statement Rule: The SEC proposal requires registered private fund advisers to distribute a quarterly statement to private fund investors with a detailed accounting of all fees and expenses paid by the private fund during the reporting period. Additionally, private fund advisors would disclose information regarding compensation or other amounts paid by the private fund’s portfolio investments to the adviser or any of its related persons. Advisers would provide information regarding the private fund’s performance.

For liquid funds, the quarterly statement would provide annual net total returns since inception, average annual net total returns over prescribed time periods, and quarterly net total returns for the current calendar year. For illiquid funds, the statement would provide the gross and net internal rate of return and gross and net multiple of invested capital for the illiquid fund to capture performance from the fund’s inception through the end of the current calendar quarter.

Private Fund Audit Rule: The SEC proposal requires registered private fund advisers to cause financial statement audits annually and upon liquidation of the private fund. The audited financial statements must be distributed to investors promptly. The audit is meant to review the advisor’s valuation of private fund assets and protect private fund investors from the misappropriation of funds.

Advisor-Led Secondaries Rule: The SEC proposal requires a registered private fund adviser to obtain a fairness opinion in connection with an adviser-led secondary transaction. The proposal also requires the adviser to prepare and distribute to the private fund investors a summary of any material business relationships the independent opinion provider has or has had within the past two years with the adviser or any of its related persons.

Prohibited Activities Rule: The SEC proposal would prohibit all private fund advisers from:

  • Charging certain fees and expenses to a private fund or its portfolio investments, such as fees for unperformed services (e.g., accelerated monitoring fees) and fees associated with an examination or investigation of the adviser
  • Seeking reimbursement, indemnification, exculpation, or limitation of its liability for a breach of fiduciary duty, willful misfeasance, bad faith, negligence, or recklessness in providing services to the private fund; and borrowing money, securities, or other fund assets, or receiving an extension of credit, from a private fund client
  • 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
  • Borrowing or receiving an extension of credit from a private fund client

Preferential Treatment Rule: The SEC proposal prohibits private fund advisors from offering preferential treatment to certain investors in regards to redemptions from the fund, information about portfolio holdings, and exposures. All other preferential treatment would be prohibited unless properly disclosed to current and potential investors.

Books and Records Rule: The SEC proposal amends the current books and records rule under the Advisors Act to require advisors to retain records related to the proposed rules.

Compliance Rule Amendments: The SEC proposal requires the documentation of an annual compliance policies and procedures review (in writing) for all registered advisers, including those that do not advise private funds.

Need help navigating the nuances of the SEC’s updates and amendments? Leverage the NRS Consulting Services or register for the NRS Spring 2022 Compliance Conference to receive further insight from industry experts.

About the Author

Nato Francescato is an NRS Consultant in the Investment Adviser and Broker-Dealer Services consulting division. He has 15 years of experience in the operational, compliance and financial services industry.

Prior to joining NRS, Nato worked with Scottrade and TD Ameritrade as a Compliance Specialist and Investment Consultant. Nato’s current responsibilities at NRS include registration services, general consulting and audit examinations.

Interested in connecting with Nato? Contact him here.