Advisers Take Action: Complying with the SEC’s ‘New Rules’
US investment professionals, be aware: the SEC’s ‘New Rules’ are in full force that can affect your investor communications.
Introduced in August 2023 and published in the federal register the following month, SEC-registered private fund advisers need to make these regulations priority for compliance and marketing measures going forward.
Here’s a quick run through of what’s required and key dates to stick in your diaries, for the attention of all private fund advisers larger (over $1.5bn in private fund AUM) and smaller (under $1.5bn AUM).
Quarterly Statements
RIAs are expected to communicate quarterly statements for any private fund that they advise within specific timeframes. For a non-fund of fund, this should be within 45 days after the end of each of the first 3 fiscal quarters, or 90 days after the fiscal year. Fund of funds are allowed 75 days, then 120 days, for the same periods respectively.
Notifying investors about statements uploaded to a data room (in ample time) is key, as well as double checking that they have gained access to them. Distribution would not count otherwise, with missing deadlines only allowed for exceptional unforeseen circumstances.
For ease, the SEC lays out the must-haves for any quarterly statement:
A fund table showing any fees or compensation paid to an adviser by the private fund, any other expenses (legal, tax, travel etc.) during the reporting period, and any rebates carried forward.
A portfolio investment table detailing all portfolio investment compensation issued to an adviser before and after any rebates or offsets.
Prominent disclosures describe how expenses, payments or offsets are calculated, backed up by calculation methods outlined in the private fund’s documentation.
A private fund’s performance differs for liquid and illiquid funds. The former requires information on net total returns for the past 10 fiscal years or since inception (whichever is shorter), average net total returns over 1, 5 and 10 fiscal years periods, and the cumulative net total return for the current fiscal year.
Adviser-led secondaries
Compliance dates: 12 September 2024 (larger advisers), 14 March 2025 (smaller advisers) Any RIAs conducting an adviser-led secondary transaction relating to a private fund are required to gain a fairness validation from independent providers, then supply a written summary to investors of any business relationships they’ve conducted in the two years since the fairness opinion was issued.
Annual Private Fund Audits
Compliance dates: 14 March 2025 (larger and smaller advisers)
After undergoing financial audits on a yearly basis, RIAs must relay this information to investors.
Written Annual Compliance Reviews
Compliance dates: 13 March 2023 (larger and smaller advisers)
Under the Advisers Act, annual compliance reviews must also be documented in writing by RIAs.
Restricted activities
Compliance dates: 12 September 2024 (larger advisers), 14 March 2025 (smaller advisers)
Applicable to everyone at private funds, including exempt reporting advisers, these include charges to private fund fees associated with any adviser under investigation from a governmental or regulatory authority, or those under examination.
Investment advisers are also prohibited from reducing clawback amounts from potential, actual or hypothetical taxes, allocating non-pro rata investment fees and expenses between fund vehicles, and borrowing or receiving a loan or extended credit from a private fund client.
The only way that these no-go actions can be granted is from gaining consent to investors after a full disclosure, if contractual agreements and operations are underway or, in the case of non-pro rata fees, if the allocation approach is fair and equitable.
Preferential treatment
Compliance dates: 12 September 2024 (larger advisers), 14 March 2025 (smaller advisers)
All advisers must provide (with written notice) specifics on preferential treatment that concerns an investors’ material economic terms such as costs of investing or fee breaks. Preferential redemption can extend to investors pooled into an investment vehicle with similar policies, objectives and strategy.
This is so long as no material negative effects are caused to other investors in the private fund where, if this is known to be possible, preferential transparency must provide investors with appropriate holdings or exposure information. Examples of material negative effects of preferential treatment could imagine an investor using key information to redeem for a fund in another redemption cycle, or to gain an opportunity to exit a fund sooner than others.
Recordkeeping, while without an enacted compliance date, is both a requirement and recommended practice in general. Filing necessary quarterly statements, audit certificates or restricted activities consents will place advisers in the good books.
This extends to the next steps in remaining compliant: outline the impacts and risks of these new rules, implement watertight policies, prepare quarterly statements for private funds, draft preferential treatment notices and consult any legal or audit consultants if needed.
We hope this is helpful for investment advisers to get ahead today, especially those considering new fund launches at the time of upcoming compliance dates. It could make all the difference to appease the regulators!
