While the SEC in recent years has been particularly focused on issues affecting retail investors, 2019 did bring some significant developments relevant to SEC-registered private fund managers. These included published SEC interpretations, rule proposals and various enforcement actions. With 2020 now upon us, we highlight and summarize some of the most notable of such developments from the past year below, and also take a look forward to the year ahead. 

Fiduciary Interpretation

In June 2019, the SEC issued a comprehensive interpretation (the Fiduciary Interpretation) reaffirming and clarifying certain aspects of the federal fiduciary duty that investment advisers owe to their clients under the US Investment Advisers Act of 1940, as amended (the Advisers Act).

The Fiduciary Interpretation confirmed that an adviser’s fiduciary duty under the Advisers Act encompasses both a duty of care and a duty of loyalty, is guided by the scope of the relationship between the adviser and the client, and that the parties may shape that relationship through contractual language provided there is full and fair disclosure and informed client consent. Importantly, the SEC acknowledged that the application of an adviser’s fiduciary duty to a retail client may be significantly different from the obligations of an adviser to a private fund (ie, sophistication is a factor in determining the extent of an adviser’s fiduciary duty). The SEC emphasized, however, that broad contractual provisions releasing an adviser from federal fiduciary duties would be inconsistent with the Advisers Act, regardless of client sophistication.

The Fiduciary Interpretation clarified that an adviser must attempt to either eliminate conflicts of interest or obtain informed consent through full and fair disclosure of all conflicts that could incline an adviser, consciously or unconsciously, to render advice which is not disinterested. Providing guidance on what constitutes “full and fair disclosure,” the SEC added that the disclosure should be sufficiently specific to put the client in a position to understand the conflict of interest and to make an informed decision as to whether to provide consent. Notably, the SEC highlighted that disclosing that an adviser “may” have a particular conflict when the conflict actually exists, or using “may” to list all possible or potential conflicts irrespective of the likelihood of the conflict occurring, is inadequate.

The concepts set forth in the Fiduciary Interpretation will be familiar to most private fund managers and largely represent an endorsement of prevailing market viewpoints and practices. However, the guidance underscores the importance of robust and precise pre-investment disclosures, as well as the need for advisers to continually monitor the impact of their actions and relationships on duties owed to their clients.  

Proxy Voting Interpretation

In August 2019, the SEC issued guidance (the Voting Interpretation) clarifying the proxy voting responsibilities of investment advisers. Echoing the Fiduciary Interpretation, the Voting Interpretation confirms the ability of an adviser and its clients to tailor the scope of the adviser’s proxy voting authority and responsibilities by agreement, including an agreement not to have responsibility for voting proxies, provided there is full and fair disclosure and informed client consent. Whatever voting arrangement is agreed upon, an investment adviser must make voting decisions in accordance with its proxy voting policies and its fiduciary duty. Advisers must likewise exercise care and diligence in evaluating, retaining and monitoring third party proxy advisory firms. Given the SEC’s focus, registered advisers would be well advised to review the adequacy of their own proxy voting policies and procedures, as well as the voting policies and procedures of any third party proxy firm retained by the adviser. 

Proposed updates to the advertising rules under the Advisers Act

In November 2019, the SEC released proposed amendments aimed at modernizing the advertising and solicitation rules under the Advisers Act. The SEC proposed a principles-based approach and highlighted the evolution of market practices and advances in technology, among other factors, as drivers of the need for the amendments.

The proposed definition of “advertisement” includes “any communication, disseminated by any means, by or on behalf of an investment adviser, that offers or promotes investment advisory services or that seeks to obtain or retain advisory clients or investors in any pooled investment vehicle advised by the adviser.”  This definition could encompass a wide variety of modern communications, including email, text messages, blogs and any form of social media.  

The proposed rules also set forth broad but less specific prohibitions on advertising content, focusing mostly on misleading or otherwise incomplete disclosure.  The proposed rules permit the use of testimonials (ie, statements provided by a client or investor), endorsements (ie, statements provided by third parties other than clients or investors) and third-party ratings in advertisements if they comply with the proposed rule’s general prohibitions and contain certain tailored disclosures. 

The use of performance information is also permitted if presented in a fair and balanced manner, subject to additional enumerated conditions for certain types of performance (eg, extracted performance, backtested performance, and target or projected performance). The SEC notably draws a distinction between retail and non-retail advertisements, with non-retail advertisements being subject to less stringent requirements. Non-retail persons are defined for this purpose as qualified purchasers (as defined in Section 2(a)(51) of the Investment Company Act) or knowledgeable employees (as defined in Rule 3c-5 under the Investment Company Act). By way of example, there is more flexibility in the proposed rules to include gross performance figures (without also including net) in non-retail advertisements, subject to certain conditions.       

Of particular note for compliance officers, the proposed rule includes a specific requirement that advertisements must be approved in writing by a designated employee before dissemination. Form ADV would also be updated to add a sub-section on the adviser’s advertising activities. 

If the proposed rules are adopted, private fund managers may have added flexibility for the content of their advertising material, but will also be prompted to undertake a thorough review of their advertising policies and procedures. 

Proposed updates to the Solicitation Rule under the Advisers Act

In the same release in which the advertising rule amendments were proposed, the SEC also proposed certain substantive changes to the solicitation rule under the Advisers Act. Most notably for private fund managers, the new rule would apply not just to the manager’s “clients” (ie, their funds and managed account investors), but also to investors in private funds. As such, if the proposed rule is adopted, any manager using placement agents may need to update their related policies and documentation. 

Compliance with the proposed rule may not present a meaningful new compliance burden, however, as many private fund managers already follow the spirit of the solicitation rule by disclosing solicitation relationships and applicable compensation arrangements to fund investors, and the proposed rule also would eliminate the requirement for a signed client acknowledgement of receipt of the relevant disclosure. Additionally, the new rule permits such disclosure to be provided by either the solicitor/placement agent or the adviser (so the adviser would not need to verify disclosure by the solicitor if the adviser provides the appropriate disclosure itself, such as in a PPM or otherwise).  

Proposed update to accredited investor definition

In December 2019, the SEC proposed amendments to expand the definition of “accredited investor” in Rule 501(a) of Regulation D under the Securities Act. The proposal would allow a broader universe of investors to participate in certain private offerings by adding new categories of natural persons who qualify as accredited investors based on professional knowledge, experience, or certain professional certifications. The proposed amendments would also expand the categories of entities that may qualify as accredited investors, including a broader “catch-all” category for any entity that owns in excess of $5 million in investments. 

If adopted, the proposed amendments may widen the marketing landscape for certain funds relying on Sections 3(c)(1) or 3(c)(5)(c) for their exemption from registration as an investment company under the Investment Company Act (and for funds that fall outside the definition of investment company altogether because they do not invest in “securities”). The marketing impact for private fund managers sponsoring 3(c)(7) funds should be negligible as third-party investors in such funds need to separately satisfy the generally much higher qualified purchaser standard. For some managers the proposed amendments may permit a slightly wider cross-section of employees to invest in its funds (whether 3(c)(1) or 3(c)(7)) given that the proposed amendments deem any “knowledgeable employee” of a fund (under Rule 3c-5 of the Investment Company Act) to be an accredited investor with respect to such fund (such that a manager’s knowledgeable employees who do not otherwise satisfy the accredited investor standard, if any, would now be permitted to invest). Any SEC-registered private fund manager also needs to be cognizant of the requirement for an investor in any fund charging a performance fee to be a qualified client under Rule 205-3 of the Advisers Act (the definition of which includes any qualified purchaser or knowledgeable employee, but is generally a higher threshold than accredited investor). 

From a documentation standpoint, the proposed amendments would likely require some minor updates to the description of accredited investor categories in fund subscription agreements and questionnaires.  

Select enforcement actions

Disclosure of conflicts of interest

Shortly after the release of the Fiduciary Interpretation, the SEC brought and settled an action against an exempt reporting adviser for failure to adequately disclose a conflict of interest with an affiliated broker. The general disclosure in the fund’s private placement memorandum that there was a “potential” conflict of interest insofar as the broker “may” receive a placement agency fee or brokerage commission from the seller in connection with the purchase of securities by the fund was deemed not adequate given the actual agreement entered into by the affiliated broker (and thus the actual conflict of interest). This case highlights the acute need for targeted disclosure to the extent a private fund manager or any of its personnel or affiliates is realizing affiliate fees or other additional revenue (ie, other than stated fund-level fees) in connection with the fund’s investments or other fund activities.     

Duty of care

Also consistent with the Fiduciary Interpretation, the SEC brought an enforcement action in August 2019 against an adviser for failing to provide full and fair disclosure of all material facts and to employ reasonable care to avoid misleading clients. Among other shortcomings, the adviser ignored and failed to disclose warnings from two banks that the purported investment opportunity was likely a fraudulent scheme.


Deficient valuation policies and procedures spawned a number of SEC enforcement actions in 2019. The SEC initiated and settled enforcement proceedings for: (i) failure to adopt and implement reasonably designed compliance policies and procedures relating to the valuation of assets; (ii) improper pricing of investments resulting in inflated profits, overstatement of net asset value in periodic statements to investors, and charging of excess management fees; (iii) using complex mathematical formulas inconsistent with generally accepted accounting principles to manipulate values of the securities owned by the investors; and (iv) inflating the total invested capital contributions when calculating management fees by failing to reduce the amount by write-downs as required by contract. It is important to note that, in cases such as these, simple negligence can be sufficient for the SEC to bring an enforcement action (ie, without a showing of intent for wrongdoing). 

Fees and expenses

The volume and granularity of fee and expense disclosure in private fund documents has grown exponentially in recent years, driven in large part by the SEC continuing to bring enforcement actions in the area.    

In 2019, the SEC again settled several enforcement proceedings related to expense allocation and disclosure of fees and expenses, including actions for: (i) failure to disclose the allocation of expenses to the funds for the cost of certain internal employees, and failure to disclose arrangements with third party service providers which posed actual or potential conflicts of interest; (ii) failure to adopt and implement written compliance policies and procedures designed to prevent the misallocation of expenses after failing to adjust compensation-related expenses for investment professionals who spent a percentage of time on tasks unrelated to the fund; (iii) ongoing failure to use correct total invested capital contributions when calculating management fees; and (iv) failure to properly allocate certain expenses between the fund and co-investors and to properly offset management fees in connection with undisclosed fee and expense-sharing agreements with co-investors.

Custody rule

The SEC settled an action against an adviser for failure to distribute audited financial statements prepared in accordance with generally accepted accounting principles to investors in numerous private investment funds within 120 days of the end of the fund’s fiscal year. Private fund managers are generally well aware of this requirement and deadline, but compliance always needs to be monitored.


The SEC brought an enforcement action against an investment adviser for violation of the “pay-to-play” rule when the adviser provided advisory services to a public pension system and public university within two years of covered associates making campaign contributions to the governor of the state. Private fund managers with state or municipal agency investors need to be especially vigilant in this area, as the SEC has shown a repeated willingness to take enforcement action for even seemingly minor or inadvertent violations.


The SEC brought an enforcement action against an adviser for improperly “re-tweeting” prohibited client testimonials and paying bloggers for client referrals without the required disclosure and documentation. 

Looking ahead

Compliance officers and legal counsel for SEC-registered private fund managers have many regulatory developments, obligations and risks to monitor and manage on a regular basis, and an SEC exam may come at any time.  In the 2019 fiscal year, 15% of registered investment advisers were examined by the SEC.   

In the year ahead, we fully expect the SEC to continue to focus on some of the themes that have been evident in the recent enforcement actions highlighted above.  Additionally, on January 7, 2020 the SEC’s Office of Compliance Inspections and Examinations released its 2020 Examination Priorities. Based on these Examination Priorities and previously released SEC risk alerts, other potential focus areas for private fund managers in 2020 include cybersecurity policies, privacy and personal information policies, managers pursuing ESG-compliant strategies, digital assets (including with respect to issues of custody and valuation), misuse of material non-public information, LIBOR transition, principal and cross-trading and electronic books and records requirements. We would also not be surprised if the SEC gives some attention to conflicts of interest and other issues relevant to private equity secondary transactions, given the rapid evolution of deal volume and structures in that market. We will be monitoring with particular interest the progress of the SEC’s proposed amendments to the advertising rules. And as always, SEC-registered private fund managers need to be mindful of their routine annual SEC filing obligations (eg, Form ADV, Form PF, Form Ds).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.