On August 23, 2023, the US Securities and Exchange Commission (the "SEC") adopted final rules imposing additional obligations on and restricting certain practices by advisers to "private funds" (the "Final Rules").

We summarize below certain high-level differences between the Final Rules and the proposal which was issued on February 9, 2022 (the "Proposal").1 In addition, we have several general takeaways as follows:

  1. Securitized asset funds (i.e., CLOs) are not subject to the Final Rules (although advisers to such vehicles will be subject to the revised compliance program requirements that apply to all SEC-registered investment advisers ("RIAs")).
  2. The SEC's long-standing application of Unibanco principles remains intact (i.e., the substantive provisions of the Final Rules will not apply to non-US advisers (whether registered or unregistered) with respect to their non-US private funds).
  3. The rules on restricted activities apply to both registered and un-registered advisers (including exempt reporting advisers).
  4. Consent to certain practices (e.g., charging of investigation costs) will require majority third-party investor consent. It is not clear if negative consent is permitted.
  5. The Final Rules reflect primarily a return to the disclosure (and consent-based) regime of the Investment Advisers Act of 1940 ("Advisers Act").

Our in-depth analysis of the Final Rules will be available in the days ahead.

PROPOSAL

FINAL RULES

Scope

Applied to all "private funds."

Applies to all "private funds," but provides key exceptions from certain provisions for "securitized asset funds" using the same definition from Form ADV and Form PF.

Transition

Did not grandfather existing funds.

Provides limited grandfathering through "legacy status" for certain aspects of preferential treatment rule (i.e., side letters) and restricted activities that require investor consent.2 Please see conformance period table for more information.

Would have provided a one-year transition period.

Provides a staggered phase-in period for compliance, with different phasing in at different times for advisers with different levels of private fund assets under management. Please see conformance period table for more information.

Prohibited/Restricted Activities

All advisers to private funds are prohibited from:

 All advisers to private funds may engage in the following activities subject to providing disclosure and/or receiving consent,3 as noted:

Charging certain fees and expenses:

  • To a portfolio investment in respect of services the adviser does not, or does not reasonably expect to, provide.

  • To a private fund for examinations or investigations of the adviser or its related persons by governmental or regulatory authorities.

  • To a private fund for regulatory or compliance expenses or fees of the adviser or its related persons.

  • On a non-pro rata basis when multiple private funds and/or other adviser clients invest (or propose to invest) in the same portfolio investment.

Charging or allocating certain fees and expenses:

  • Not adopted. (Though the SEC believes this activity generally already runs contrary to an adviser's federal fiduciary obligations to its clients.)

  • To a private fund for investigations of the adviser or its related persons by governmental or regulatory authorities without prior written notice to, and consent from, a majority of third-party investors; provided, however, that a private fund cannot (irrespective of investor disclosure and consent) be charged for investigations that result in a sanction for any Advisers Act violation.

  • [...as proposed] unless the adviser provides itemized written notice of any such fees or expenses to investors within 45 days after the end of the fiscal quarter in which the charge occurs.

  • [...as proposed] unless the adviser determines, and provides prior written notice describing how, the non-pro rata charge or allocation is fair and equitable under the circumstances.

Reducing any clawback obligation by actual, potential or hypothetical taxes.

[...as proposed] unless the adviser provides written notice of the pre-tax and post-tax amount of clawback within 45 days after the end of the fiscal quarter in which such clawback occurs.

Seeking reimbursement, indemnification, exculpation or limitation of liability for simple negligence or breach of fiduciary duty.

Not adopted.

Waiving, disclaiming or otherwise limiting their fiduciary duties under the Advisers Act or state law.

Not adopted. (But the adopting release provides guidance regarding the interaction between "hedge clauses" and waivers of fiduciary duty.)

Borrowing money, securities or other fund assets, or receiving a loan or an extension of credit, from a private fund.

Borrowing money, securities or other fund assets, or receiving a loan or an extension of credit, from a private fund without (i) written disclosure of the material terms to each fund investor and (ii) consent from at least a majority in interest of unrelated third party fund investors.


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