The Security and Exchange Commission proposes new rules for private fund advisers.
In a 341-page document, the Security and Exchange Commission (SEC) proposed in February 2022 new rules and amendments to increase transparency, competition, and efficiency in the private equity market. The proposed new rules would:
1. Require private fund advisers registered with the Commission to provide investors with quarterly statements detailing information about private fund performance, fees, and expenses;
2. Require registered private fund advisers to obtain an annual audit for each private fund and cause the private fund’s auditor to notify the SEC upon certain events;
3. Require registered private fund advisers, in connection with an adviser-led secondary transaction, to distribute to investors a fairness opinion and a written summary of certain material business relationships between the adviser and the opinion provider;
4. Prohibit all private fund advisers, including those that are not registered, from engaging in certain activities and practices that are contrary to the public interest and the protection of investors; and
5. Prohibit all private fund advisers from providing certain types of preferential treatment that have a material negative effect on other investors, while also prohibiting all other types of preferential treatment unless disclosed to current and prospective investors.
Additionally, the SEC is proposing to require all registered advisers, including those that do not advise private funds, to document the annual review of their compliance policies and procedures in writing.
Specifically, the proposals would for instance prohibit all private fund advisers from engaging in several activities, including:
1. Seeking reimbursement, indemnification, exculpation, or limitation of liability for a certain activity;
2. Charging certain fees and expenses to a private fund or its portfolio investments: fees for underperformed services and fees associated with an examination or investigation of the adviser;
3. Reducing the amount of an adviser clawback by the amount of certain taxes;
4. Charging fees or expenses related to a portfolio investment on a non-pro rata basis;
5. Borrowing or receiving an extension of credit from a private fund client.
The SEC feels the need to enhance the regulation of private fund advisers to better protect private fund investors. The Commission would like:
1. Investors to have greater visibility into certain practices;
2. To address practices that may harm investors and prohibit adviser activity that is contrary to the public interest and the protection of investors.
Private funds and their advisers have more than $18 trillion in gross assets. As such, they play a critical role in the United States of America’s financial markets and the lives of everyday Americans. Some of the largest private fund investors include state, municipal and private pension plans that provide retirement and other benefits to everyday Americans.