How You Might Be Impacted By New SEC Rules
The Securities and Exchange Commission (SEC) recently adopted rules and amendments to enhance the regulation of private fund advisers. The reforms are designed to protect investors by increasing the transparency into the operations of their fund investors. The sweeping rule changes are over 600 pages long. Below are a couple of key changes fund advisors should know as they are documenting their review of their compliance policies and procedures.
Reporting
The new rules require private fund advisers registered with the SEC to provide investors with quarterly statements providing simple and clear information about fund performance, fees, and expenses. Advisers are also required to obtain an annual audit for each private fund they advise, and share these with investors within 120 days of the fund’s fiscal year-end. In addition, fund advisors must provide a fairness opinion or valuation opinion for any adviser-led secondary transaction. The SEC believes these new reporting requirements can provide an important check on the adviser’s valuation of private fund assets and protect private fund investors against the misappropriation of fund assets.
Regulatory, Compliance, and Examination Expenses
To address certain conflicts of interest that have the potential to lead to investor harm, the reforms include a new rule that restricts private fund advisers from charging or allocating their funds for regulatory and compliance fees of the advisor and fees associated with an examination of the advisor by any regulatory or governmental authority, unless the advisor distributes a written notice detailing the amount of fees charged to the fund.
Non-Pro Rata Fee and Expense Allocations
Additionally, the rules limit the ability of Advisers to charge or allocate fees and expenses related to a portfolio investment on a non-pro rata basis when multiple private funds or other clients advised by the adviser have invested in the same portfolio investment. An exception to these rules was provided if Advisers distribute written notice of any such fees or expenses, and the dollar amount thereof, in writing on at least a quarterly basis.
Preferential Treatment
The new rules also prohibit private fund advisers from providing preferential treatment to investors when the advisor reasonably expects a material negative effect on other investors. This includes giving an investor preferred interest redemption terms and granting preferred transparency with selective investors when the adviser reasonably expects that providing the information would have a material negative effect on other investors.
Compliance Date
The compliance date for the Private Fund Audit Rule and the Quarterly Statement Rule is 18 months after the date of publication in the Federal Register. The compliance dates for the Adviser-Led Secondaries Rule, the Preferential Treatment Rule, and the Restricted Activities Rule are 12 months after the date of publication in the Federal Register for advisers with $1.5 billion or more in private funds assets under management and 18 months after the date of publication in the Federal Register for advisers with less than $1.5 billion in private funds assets under management.
How We Can Help
The new SEC rules can be complex and failure to comply could lead to severe consequences. Industry-specialized professionals like Andrew Huss or Jon Haidet can review existing fund documents, side letter agreements, and fee allocations to portfolio investments.
Jeremy is a Principal in the Real Estate Industry. He is a trusted advisor with 10 years of experience providing accounting, assurance, and consulting services to real estate industry owners, operators, and developers.
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