On August 23, 2023, the Securities and Exchange Commission ("SEC") adopted new rules regarding the regulation of private funds and their advisors, providing an update to the existing compliance rules already in place for investment advisers. 1 These rules created new obligations for investment advisers to private funds in order to increase transparency and "fair" disclosures among investment advisers registered with the SEC to their investors.

When Must Investment Advisers Comply With the Rules?

The compliance date for most of the new rules is March 2025. 2 The costs for advisers to comply with these new rules is expected to be significant.

What Are the New Rules?

(1) Quarterly Statement Rule

  • This rule requires that (i) for the first three quarters of a fund's fiscal year, a quarterly statement be delivered to fund investors within 45 days of the end of each quarter, and (ii) for the final quarter of a fund's fiscal year, a quarterly statement be delivered to fund investors within 90 days of the end of that quarter. 3
  • The required information is at the fund level and portfolio company level. 4
  • Each quarterly statement must include:
    • A fund-level table with a detailed accounting of all compensation paid or allocated to the RIA/its related persons, fund fees and expenses, and any fee offsets or rebates carried forward during the reporting period to the following quarterly period; 5
    • A portfolio investment-level table including a detailed accounting of all portfolio investment compensation allocated or paid to the RIA/its related persons by each covered portfolio investment during the reporting period; 6
    • For illiquid funds, standardized investment performance information since such fund's inception through the end of the covered fiscal quarter, including: 7
      • The fund's gross and net internal rate of return ("IRR") and multiple on invested capital ("MOIC"), calculated both with and without the impact of fund-level subscription facilities; 8
      • The fund's gross and net IRR and MOIC for the realized and unrealized portions of such fund's portfolio, calculated both with and without the impact of fund-level subscription facilities; and 9
      • (iii) A statement of contributions and distributions. 10
    • Prominent disclosures regarding the manner in which expenses, payments, allocations, rebates, waivers, and offsets were calculated and cross-references to the applicable sections of the private fund's organizational documents. 11

(2) Preferential Treatment Rule

  • Preferential treatment (e.g., reduced fees, better info rights) is generally not permitted unless offered to all investors (referred to as the "Preferential Treatment Rule"). 12
  • The RIA (fund adviser) must keep detailed records of any notification, consent, or other document is distributed to or received from private fund investors pursuant to the Preferential Treatment Rule, along with a record of each addressee and the corresponding date(s) each document/notice is sent. 13

(3) Restricted Activities Rule

  • The "Restricted Activities Rule" prohibits a fund adviser from charging a fund for (i) regulatory and compliance expenses of the RIA (fund adviser), and (ii) fees and expenses associated with any regulatory exams, unless the RIA distributes a written notice of such expenses (the notice must include the dollar amount of expenses and be delivered to the investors within 45 days after the end of the quarter in which the charge occurs) and gets investor consent. 14
  • Fees must be assessed to investors on a pro-rata basis (subject to narrow exemptions – which include prior to charging fees, the RIA sends each fund investor written notice of the non-pro rata charge and a description of how it is fair and equitable under the circumstances). 15
  • RIA may not borrow from the fund without investor consent. 16

For a list of more applicable rules, click here.

Who Do the Rules Apply to?

(1) Quarterly Statement Rule: Only applies "to investment advisers that are registered or required to be registered with the Commission." 17

(2) Preferential Treatment Rule: Applies to all private fund advisers, venture capital fund advisers, foreign private advisers, all other unregistered investment advisers to private funds, and registered advisers to private funds. 18

(3) Restricted Activities Rule: Applies to all private fund advisers, venture capital fund advisers, foreign private advisers, all other unregistered investment advisers to private funds, and registered advisers to private funds. 19

Footnotes

1. https://www.sec.gov/news/press-release/2023-155?utm_medium=email&utm_source=govdelivery

2. https://www.sec.gov/files/rules/final/2023/ia-6383.pdf

3. Id. At 143.

4. Id. At 62-63.

5. Id. At 647-648.

6. Id.

7. Id. At 649.

8. Id.

9. Id.

10. Id.

11. Id. at 101.

12. Id. at 259-260.

13. Id. at 640.

14. Id. at 24-25.

15. Id. at 25.

16. Id.

17. Id. at 68.

18. Id. at 626.

19. Id.

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.