SEC Adopts Private Fund Adviser Rules Aimed at Increasing Transparency

The Securities and Exchange Commission has adopted new rules and amendments that regulate private fund advisers, with the intention of protecting private fund investors by increasing transparency, competition and efficiency. According to the SEC, the rules also aim to protect investors who have indirect exposure to private funds through pension plans, endowments, foundations and certain retirement plans.

“Private funds and their advisers play an important role in nearly every sector of the capital markets,” SEC Chair Gary Gensler said in a release. “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.”

The new rules require private fund advisers registered with the SEC to provide investors with quarterly statements that detail information regarding fund fees, expenses and performance. The rules also require registered private fund advisers to obtain and distribute to investors an annual financial statement audit of each private fund it advises and to provide, in connection with an adviser-led secondary transaction, a fairness opinion or valuation opinion.

Private fund advisers will be prohibited from providing investors with preferential treatment regarding redemptions and information if it would have a material, negative effect on other investors. According to the SEC, in all other cases of preferential treatment, it has 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.

The rules restrict certain other private fund adviser activities that the SEC deemed “contrary to the public interest and the protection of investors.” As long as private fund advisers provide appropriate specified disclosure, or in some cases obtain investor consent, they generally will not be prohibited from engaging in certain restricted activities.

Additionally, the SEC stated the new rules will not allow advisers to charge or allocate to private funds certain investigation costs when there is a sanction for a violation of the Investment Advisers Act of 1940 or SEC rules.

To avoid requiring advisers and investors to renegotiate governing agreements for existing funds, the SEC adopted legacy status provisions for certain restricted activities and preferential treatment provisions. The legacy status will apply to governing agreements that were signed prior to the compliance date and with respect to funds that have begun operations as of the compliance date.

Commissioner Hester Peirce, who voted against the changes, warned that the new rules will harm investors, advisers and the economy, while Commissioner Mark Uyeda called the new rules “arbitrary and capricious.”

“We are gearing up to impose a retail-like framework on this very institutional marketplace,” Peirce said in a statement. “We are adopting a prescriptive regime that edges out mutually agreed upon ground rules for private funds. … As long as investors understand the terms on which they are investing, why should the government care what those terms are?”

Uyeda said in a statement that the new rules “are far more burdensome and restrictive than those products for retail investors.” He said the SEC is relying on “questionable statutory authority, fails to consider the aggregate impact of the multitude of rules promulgated since 2022 affecting investment advisers, and dismisses warnings that it will have a disparate impact on smaller advisers, including those that are minority- and women-owned.”