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Proposed Rule Changes for Private Fund Advisers

March 2, 2022

On February 9, 2022, the Securities and Exchange Commission (SEC) proposed new rules (Proposed Rules) under the Investment Advisers Act of 1940 (Advisers Act) that, if adopted, would significantly impact private fund advisers. Below is a high-level summary of the Proposed Rules and their potential impact on affected advisers.

Annual Audit Requirement

The Proposed Rules would require SEC-registered advisers to obtain annual audited financial statements for each private fund they advise. Fund auditors would also be required to promptly notify the SEC if a modified opinion is issued or the auditor’s engagement is terminated.

Notably, the audit requirement under the Proposed Rules is a separate and distinct requirement from custody requirements pursuant to Rule 206(4)-2 under the Advisers Act, i.e. the Proposed Rules do not permit advisers to elect a surprise examination in lieu of an audit.

Quarterly Statements

Under the Proposed Rules, SEC-registered advisers would be required to provide quarterly account statements to investors in each private fund they advise. The statements would need to be presented in a standardized format that includes a “detailed accounting” of specific fee and expense disclosures, portfolio investment compensation paid to the adviser or its affiliates, standardized fund performance information based on the type of fund (i.e. “liquid” vs. “illiquid”), etc. The statements would need to be provided within 45 days of the end of each calendar quarter.

Prohibited Activities

The Proposed Rules would prohibit both SEC-registered and unregistered advisers from certain activities with respect to private funds, including the following:

  • Providing preferential treatment to certain investors via side letter agreements (Side Letters) with respect to redemption rights or access to information regarding portfolio holdings or exposures, if the adviser reasonably expects such preferential treatment would have a material, negative effect on other investors (although not outright prohibited, certain other preferential terms—including fee discounts and additional investment rights—would need to be disclosed in writing to prospective and current investors);
  • Reducing clawbacks of carried interest paid to the adviser to be net of taxes;
  • Reimbursing, indemnifying or limiting the liability of the adviser for breaches of fiduciary duties, willful misfeasance, bad faith, recklessness or negligence in providing services to a private fund;
  • Charging private funds for accelerated monitoring fees, costs related to examinations or investigations of the advisers or adviser regulatory and compliance costs;
  • Borrowing funds from a private fund; and
  • Allocating costs related to portfolio investments held by multiple funds and/or co-investment vehicles on a non-pro rata basis.

With respect to the prohibited activities in connection with Side Letters, the lack of a “grandfathering” provision would be uniquely challenging for existing advisers affected by the Proposed Rules; such advisers would effectively have to choose between complying with the Proposed Rules or breaching a previously granted Side Letter provision.

A public comment period regarding the Proposed Rules will remain open for 60 days following publication on the SEC website or 30 days following publication in the Federal Register, whichever is longer. The Proposed Rules would mark a landmark shift in SEC regulation of private fund advisers, and we will continue to monitor any related developments. Should you have any questions regarding this alert or the Proposed Rules in general, feel free to contact Kevin Cott at