The Securities and Exchange Commission ("SEC"), in a vote on August 23, 2023, adopted several new rules that apply primarily to investment advisers to private funds (for purposes of this note, the "New Rules"). The New Rules, promulgated under the Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"), impose significant requirements on private fund advisers and represent a continuation of the recent migration away from the SEC's traditional reliance on principles-based and disclosure-focused regulation of the alternative investment management sector toward a prescriptive, rule-based regulatory regime.

The New Rules are set out in Rules 211(h)(1)-1 (definitions), 211(h)(1)-2 (required quarterly statements), 211(h)(2)-1 (restriction on certain terms for private funds), 211(h)(2)-2 (adviser-led secondaries), 211(h)(2)-3 (restrictions on preferential terms for private fund investors), 206(4)-7 (documentation of annual compliance reviews), 206(4)-10 (required financial statement audits of private funds), and 204-2 (record-keeping relating to requirements under the New Rules). The New Rules were formally published in the Federal Register on September 14, 2023.

Overview of the New Rules

Substantively, the New Rules relate to six distinct areas:

  1. Restricting certain conflicted economic terms. The New Rules restrict both SEC-registered and unregistered investment advisers from engaging in certain activities that present economic conflicts of interest unless the investment advisers provide specified notice to the applicable private fund investors or, for certain activities, obtain such investors' consent.
  2. Restricting preferential treatment for investors. Under the New Rules, both SEC-registered and unregistered investment advisers must comply with substantial requirements on the manner in which they and their related persons provide preferential redemption, portfolio information, material economic rights, and other preferential terms to some investors relative to others.
  3. Requiring quarterly statements. SEC-registered investment advisers will have to provide private fund investors with quarterly reports, with the New Rule specifying the content of these reports relating to fund-level performance, investment adviser compensation, fees and expenses, and portfolio investment-related compensation.
  4. Requiring annual audits. SEC-registered investment advisers will be required by the New Rules to obtain and deliver to investors audited financial statements of the private funds they advise (notwithstanding if the investment adviser previously relied on "surprise verification" to comply with Rule 206(4)-2 under the Investment Advisers Act (the "Custody Rule") with respect to the applicable private fund).
  5. Imposing requirements on adviser-led secondaries. To conduct an adviser-led secondary transaction between funds that it advises, an SEC-registered investment adviser will be obligated to obtain a fairness opinion or valuation opinion and provide both the opinion and a summary of the adviser's material business relationships with the opinion provider to the relevant private funds' investors.
  6. Books and Records. All SEC-registered investment advisers (in the case of this rule, without regard to whether such advisers advise private funds) will be required to document their Rule 206(4)-7-required annual review of their compliance policies and procedures. In addition, the New Rules include additions to Rule 204-2's list of the books and records required to be maintained by SEC-registered investment advisers to cover the items mandated by the other New Rules.

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