New Operating Burdens for Private Fund Managers

Reporting requirements and restrictions are coming into effect

The Securities and Exchange Commission (“SEC”) has adopted new rules for private fund advisors under the Investment Advisers Act of 1940 (the “Act”). These rules enhance reporting requirements for private funds to increase investor visibility into certain private fund practices. The new rules listed below are intended to provide transparency into certain private fund practices such as compensation schemes, sales practices, and conflicts of interest.

Included in this article are brief highlights describing the significant changes the new Private Funds Rule brings to fund managers.

New Rules for Registered Private Fund Advisors

• Provide investors with quarterly statements detailing information regarding private fund performance, fees, and expenses;
• Obtain an annual audit for each private fund; and
• Obtain a fairness opinion or valuation opinion in connection with an adviser-led secondary transaction.

New Rules for All Private Fund Advisors

• Prohibit engaging in certain activities and practices that are contrary to the public interest and the protection of investors unless they provide certain disclosures to investors, and in some cases, receive investor consent; and
• Prohibit providing certain types of preferential treatment that have a material negative effect on other investors and prohibit other types of preferential treatment unless disclosed to current and prospective investors.

Restricted Activities with Disclosure-Based Exceptions

These new rules also prohibit certain expenses and fees from being charged back to the private fund clients. As an exception, the advisor will need to distribute written notice of any fees or expenses noted below and the dollar amount of the fees or expenses to investors of the private fund in writing on a quarterly basis. These chargeback-restricted expenses include:

• Charging private fund clients for regulatory or compliance fees and expenses of the advisor or related persons
• Charging private fund clients for fees and expenses associated with an examination of the advisor or its related persons by any governmental or regulatory authority

Adoption Period

These new rules are effective November 13, 2023, and will have a staggered adoption period. For the audit and quarterly statement rule, there will be an 18-month transition period. For the advisor-led secondaries rule, preferential treatment rule, and restricted activities rule, the adoption period is based on assets under management. Advisors with $1.5 billion or more private fund assets will have a 12-month transition period while advisors with less than $1.5 billion of private fund assets will have an 18-month transition period.

Keiter’s Financial Services Industry team is closely monitoring these and other possible regulation changes. We will keep you updated so you can plan accordingly. If you have any questions, please reach out to your Keiter Opportunity Advisor or Email | Call: 804.747.0000