United States: The SEC's new Private Fund Adviser rules

Impacts for US-based and certain non-US Private Fund Advisers

In brief

On 23 August 2023, the SEC adopted the most significant regulation affecting private funds and their investors since the Dodd-Frank reforms over a decade ago. Among other changes, the new rule:

  1. Regulates how investment advisers1 charge co-investment fees and expenses.
  2. Restricts the ability of funds to enter into side letters or provide certain terms.
  3. Creates new detailed quarterly reporting requirements.

The Baker McKenzie Funds team held a webinar to discuss this sweeping rule adoption and its impacts over the next 18 months. To view this webinar, please click the following:

Application to US-Based and Non-US Private Fund Advisers

Outside the United States

  • These new rules apply to both SEC-registered and SEC-exempt managers of US-domiciled private funds.
  • The rules do not apply to non-US managers of non-US domiciled funds.

Inside the United States

  • For US-domiciled managers, these rules apply to both US and non-US private funds.
  • The new rule has a broader application than any existing SEC regulation, touching state-registered advisers and otherwise exempt advisers as detailed further below. 

In More Detail 

The application of the Private Fund Adviser Rules generally breaks down into two components:

  • The Restricted Activities Rule and Preferential Treatment Rule (applicable to any kind of US adviser and any non-US adviser to a US private fund).
  • The Quarterly Statement Rule, Private Fund Audit Rule, and Adviser-Led Secondaries Rule (applicable to SEC-registered US and non-US advisers with a US private fund).

Restricted activities rule (All US private fund advisers and non-US private fund advisers to a US fund).

All private fund advisers are prohibited from taking certain actions unless such actions are disclosed and, in some cases, consented to by investors. Specified activities include:

  • Restrictions on charging regulatory expenses to private funds.
    • Under the Rule, a fund may pay for fees or expenses related to a regulatory investigation of the adviser or its affiliates if the fund discloses these expenses and receives investor consent.
    • However, if the investigation results in a sanction for violating the Adviser's Act, the adviser must reimburse the fund for such expenses.
    • A fund may pay for regulatory or compliance fees associated with regulatory examinations of an adviser (including the development of the adviser's compliance program) if the adviser discloses the details (including dollar amounts) to investors quarterly.
  • Reducing adviser carry clawback liabilities.
    • Where a fund organizing document requires an adviser to return excess distributions of its carried interest, the final rule permits advisers to reduce those "clawback" liabilities by an actual, potential, or hypothetical amount of taxes provided the adviser informs investors of the impact of pre-tax and post-tax adviser clawback reductions.
  • Non-pro-rata charges to co-investments.
    • Under the Rule, an adviser is required to charge fees and expenses related to portfolio investments on a pro-rata basis whenever multiple clients of an adviser or its related persons are investing, unless:
      • The adviser determines that a non-pro-rata charge or allocation is fair and equitable under the circumstances.
      • Prior to charging or allocating such fees or expenses to a private fund client, the investment adviser distributes to each investor of the private fund a written notice of non-pro rata charges or allocations and a description of how it is fair and equitable under the circumstances.
  • Loans from private funds to advisers.
    • Advisers are prohibited from borrowing money, securities, or fund assets or obtaining credit from a private fund client unless the adviser:
      • Distributes a written notice and description of the material terms of the borrowing to the investors of the private fund.
      • Seeks the investors' consent for the borrowing.
      • Obtains written consent from a majority in interest of the fund's investors.

Preferential treatment rule (All US private fund advisers and non-US private fund advisers to a US fund)
All private fund advisers are prohibited from providing preferential redemption or transparency terms if the adviser "reasonably expects" these rights to have a material, negative impact on other fund investors in the private fund or in a similar pool of assets unless:

  • The investor's ability to redeem is required by law, rule, regulation, or government order; or
  • The adviser offers the same redemption and transparency terms to all existing investors and will offer these terms to all future investors (e.g., via a share class with no investment minimum).

Other preferential treatment terms are not prohibited but will require disclosure to investors. Advisers are required to disclose:

  • Preferential treatment with respect to "material economic terms" prior to any investor's investment in the private fund.
  • All preferential treatment terms after the sale to the investor in the private fund.
  • Annual disclosure of preferential treatment to all investors thereafter.

Adviser led secondaries rule (SEC-registered US investment advisers and non-US registered investment advisers with US funds).

Registered investment advisers are required to obtain a fairness opinion or valuation opinion in connection with any adviser-led secondary transaction. The entity issuing the relevant opinion must be an independent opinion provider, and an adviser must disclose to investors any material relationship between the adviser and the opinion provider over the last two years.

Private fund audit rule (SEC-registered US investment advisers and non-US registered investment advisers with US funds).

Registered investment advisers are required to have a financial statement audit for their private funds prepared in line with the Custody Rule (206-(4)-2) at least annually and upon liquidation. Non-US private funds are permitted to us other audit standards but would need to reconcile material differences to GAAP.

Auditors are required to notify the SEC if the audit firm issues an audit report that contains a modified/qualified opinion or if the audit firm resigns or is otherwise terminated.

Quarterly statements rule (SEC registered US investment advisers and non-US registered investment advisers with US funds).

Registered investment advisers are required to provide quarterly fund and portfolio level fee and expense reporting to all private fund investors. The adviser must also disclose performance information according to specified requirements.

Other Compliance Considerations

Compliance rule amendments

The SEC also added a stand-alone written compliance review requirement applicable to all SEC registered investment advisers regardless of whether they have private fund clients. Under the Compliance Rule Amendments, any registered investment adviser must maintain a written record of their annual compliance program reviews under Rule 206(4)-7.

Books and records rule amendments

The SEC amended the Books and Records rule requirements to require registered investment advisers to maintain books and records related to new Private Fund Adviser rules.

Legacy status

The Preferential Treatment Rule and Restricted Activities Rules that require consent will not be applied to organizational documents (including side letters) entered into prior to the compliance date. However, the disclosure requirements for preferential treatment will still apply, and advisers will not be able to recoup fees and expenses from the fund for any investigations resulting in a sanction for violating the Advisers Act, even with respect to funds with "legacy" status.

Implementation timeline

Compliance Program Rule Amendments: November 13, 2023.

Private Fund Audit Rule and Quarterly Statement Rule: March 14, 2025.

Adviser-Led Secondaries, Preferential Treatment Rule, and Restricted Activities:

  • Large Advisers with over USD 1.5 billion in regulatory assets under management attributable to private funds: September 14, 2024.
  • Small Advisers with under USD 1.5 billion in regulatory assets under management attributable to private funds: March 14, 2025.

For an in-depth discussion of the final rule and changes impacting private funds and private fund advisers, To view this webinar, please click the following links:

  • Computer Access - Click here
  • Mobile Device Access - Click here

Related contentThe SEC's New Private Fund Adviser Rule: What Fund Managers Need to Know Now

1  In the US Investment Advisers Act, the term "investment adviser" encompasses both discretionary and non-discretionary advisers, investment managers, and many other types of financial sponsors.

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