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14 February 202212 minute read

SEC proposes fundamental changes to private fund regulation

On February 9, 2022, in a 3-1 vote, the US Securities and Exchange Commission proposed a series of new rules and amendments under the Investment Advisers Act of 1940 that, if finalized, would impose a host of new and onerous mandates on private fund1 advisers, including those not registered with the SEC. Certain of the proposals codify positions we have seen the SEC staff take during exams, while others appear to derive from pronouncements by limited partner industry groups.

Below we briefly summarize the proposed rules and related amendments and identify each category of adviser they will impact. Check back for additional updates as we continue to monitor the rule proposal and market reaction.

What was included in the package of new rules and amendments?

SEC-Registered Private Fund Advisers


Quarterly Statement Rule

  • Would require advisers to deliver a standardized statement to private fund investors within 45 days after each calendar quarter that generally includes (1) a table containing a detailed accounting of all fees, expenses, carried interest and other performance-based compensation paid by the private fund during the reporting period (before and after the application of any offsets, rebates or waivers), as well as disclosure regarding the calculation methodology for those amounts and cross references to the sections of the governing documents setting forth the methodology (such as the distribution waterfall, if applicable); (2) a table disclosing all compensation and other amounts paid by the private fund’s portfolio investments to the adviser or any of its related persons (before and after the application of any offsets, rebates or waivers), as well as disclosure regarding the private fund’s ownership percentage of each such portfolio investment; and (3) standardized performance information based on the type of fund, including prominent disclosure of the criteria used and assumptions made in calculating the performance. Closed-end funds generally would be required to provide the gross and net internal rate of return and gross and net multiple of invested capital from inception through the end of the current calendar quarter, and open-end funds generally would be required to 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.

Private Fund Audit Rule

  • Would require advisers to (1) cause the private funds they advise to undergo a US GAAP (or substantially similar non-US accounting methodology with material differences reconciled to US GAAP) financial statement audit by an independent public accountant least annually and upon liquidation and (2) promptly upon completion, distribute the audited financial statements to investors. The accounting firm would also be required to notify the SEC promptly upon (1) issuing an audit report that contains a modified opinion or (2) the termination of the accounting firm’s engagement (whether by resignation or dismissal). As proposed, an adviser would not be required to file a copy of the audit report or a copy of the audited financial statements with the SEC. Note that, while similar to the existing custody rulethe financial statement audit performed under either rule would be the samecompliance with the custody rule would not automatically satisfy the requirements of the proposed audit rule.

Adviser-Led Secondaries Rule

  • If an adviser conducts an adviser-led secondary transactiongenerally, where the adviser offers existing investors the option to sell or to exchange their interests in the private fund for interests in another vehicle advised by the adviser or any of its related personsit would be required to distribute to investors, prior to the closing of the transaction, (1) a fairness opinion from an independent opinion provider and (2) 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.

All Private Fund Advisers

(including state-registered advisers, exempt reporting advisers, and all others that are not registered with the SEC or with the states)


Prohibited Activities Rule

  • Would prohibit all private fund advisers from engaging in certain commonly observed activities and practices that the SEC views as contrary to the public interest and the protection of investors, regardless of whether the activities are permitted under the fund’s governing documents or otherwise disclosed, or were approved by investors or a limited partner advisory committee, including:
    • Charging certain fees and expenses to a private fund or its portfolio investments, such as (1) fees for unperformed services (eg, accelerated monitoring fees or fees in excess of management fees available for offset), (2) costs associated with an examination or investigation of the adviser or its related persons, and (3) regulatory or compliance expenses of the adviser or its related persons (eg, costs of preparing the adviser’s Form ADV);
    • Seeking reimbursement, indemnification, exculpation, or limitation of its liability for an adviser’s breach of fiduciary duty, willful misfeasance, bad faith, negligence, or recklessness in providing services to the private fund, even when disclosed and permissible under state law;
    • Reducing the amount of an adviser or general partner clawback by the amount of certain actual, potential or hypothetical taxes applicable to the adviser, its related persons, or their respective owners or interest holders;
    • Charging fees or expenses related to a portfolio investment on a non-pro rata basis when multiple private funds and other clients advised by the adviser or its related persons have invested (or propose to invest) in the same portfolio investment, including non-pro rata allocations of “broken deal” expenses with respect to co-investment vehicles; and
    • Borrowing or receiving an extension of credit from a private fund client.

Preferential Treatment Rule

  • Would prohibit all private fund advisers from (1) providing preferential redemption rights or preferential portfolio information rights to certain investors, if the adviser reasonably expects such rights to have a material negative effect on other investors in the private fund or in a substantially similar pool of assets, and (2) providing any other types of preferential treatment (eg, fee discounts, co-investment rights or excuse rights) to certain investors unless the specific terms are disclosed to prospective investors prior to their investments and to current investors annually. An adviser could comply with the proposed disclosure requirements by providing copies of side letters (with identifying information regarding the other investors redacted) or a written summary of the preferential terms provided to other investors in the same private fund.

All SEC-Registered

Investment Advisers

Books and Records Rule Amendments

  • Would require all registered investment advisers to retain records related to the above proposals to facilitate the SEC’s ability to assess an adviser’s compliance with the new rules.

Compliance Rule Amendments

  • Would require all registered investment advisers to document the annual review of their compliance policies and procedures in writing.

What’s next?

The public comment period will remain open for 60 days following publication of the proposing release on the SEC’s website on February 9, 2022 (ie, April 11, 2022), or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

Given that many of the proposed rules would represent a significant departure from long-standing market practice, we expect private fund advisers and other industry participants to be highly engaged in providing comments and input during this period. If the proposed rules are adopted, the SEC is proposing a one-year transition period for advisers to come into compliance, including with respect to existing funds, for which no grandfathering is proposed.

If you have any questions about the proposed rules, submitting a comment, or how the proposed rules may impact your business, please contact the authors, your DLA Piper relationship attorney or a member of the DLA Piper Investment Funds team.


1 A “private fund” is defined as an issuer that would be an investment company but for the exclusions contained in Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940. Notably, this definition does not include many real estate funds, including those relying on Section 3(c)(5)(C). The SEC has requested comment on whether certain aspects of the proposed rules should apply to real estate funds and other types of pooled investment vehicles that are not “private funds.”