By Ian Meiksins, KBC President

On August 23rd, 2023 the Securities and Exchange Commission (“SEC”) approved a final rule making a vast array of changes to the Investment Advisors Act of 1940, attempting to provide investors within private funds, managed by Advisors, more protections and safeguards.

While the final ruling is a significant reduction in severity from the proposed rule in February, 2022, it does have major implications on the regulatory and operational burden of Private Fund Advisors.

Three significant changes from the final rule for SEC-registered Advisors are:

  1. Quarterly Statement Rule – Private Fund Advisors must now furnish investors with quarterly statement that have standardized performance reporting amongst other items.
  2. Audit Rule – While a common practice, Advisors must not now obtain an independent audit of each private fund they advise. These audits must meet the requirements of the audit provision in the Custody Rule.
  3. Adviser-led Secondaries Rule – If an Advisor is conducting an advisor-led secondary transaction, they must now obtain an independent fairness or valuation opinion.

In addition to these changes, the SEC made sweeping revisions to the books and records rule, requiring Advisors to keep certain records of the above mentioned provisions along with the Advisors Compliance Policies and Procedures.  Further, the new rule requires all SEC registered Advisors of private funds to document an annual compliance review, in writing.

The SEC also adopted several more rules impacting all Private Fund Advisors, (both registered and non registered):

  1. Restricted Activities Rule – New rule 211(h)(2)-1 now restricts many practices unless the Advisor provides written and clear disclosure to all investors, including:
    1. Allocation of compliance fees and expenses, including fees and expenses stemming from an regulatory or governmental investigations into the Private Fund.
    2. Non-Pro Rata Fee and Expense Allocations
    3. Borrowing from private fund clients.
      **Private Fund Advisors who borrow funds or securities from private fund clients must obtain written consent from the majority of Fund investors, along with providing written disclosure.
  2. Preferential Treatment Rule – New rule 211(h)(2)-3 now limits Advisors ability to provide certain preferential redemption treatment to investors, unless those rights are offered to all investors and prospective investors. Additionally, the Rule prohibits information sharing rights that the Advisor expects could have a materially negative impact on other investors.

The SEC has adopted an 18 month implementation timeline for the Audit and Quarterly statement rule.  While they have adopted a staggered transition period for the Advisor Led Secondaries Rule, Preferential Treatment and Restricted Activities Rule:

  1. For advisers with $1.5 billion or more in private funds assets under management: a one-year transition period.
  2. For advisers with less than $1.5 billion in private fund assets: an 18-month transition period.

The Final rule will require significant implementation efforts from Private Fund Advisors and we encourage Advisors who manage private funds to begin the transition plans as soon as possible.

If you and your firm need compliance support, please contact Matt Swendiman at 859-468-7044.