Investment Management Advisory: SEC Proposes Rules for Private Fund Advisers

An Alston & Bird Investment Management Advisory

Our Investment Management, Trading & Markets Team offers practical takeaways from the Securities and Exchange Commission’s pair of proposed rules that would bring extensive changes to how private fund advisers can do business.

• The private fund adviser proposal brings six different rules into play
• The cybersecurity proposal addresses exposure to cyber-threats
• Both sets of rules amend the Advisers Act’s books and records rule

Early last month, on February 9, 2022, the U.S. Securities and Exchange Commission (SEC) proposed a number of sweeping new and amended rules the under the U.S. Investment Advisers Act of 1940, as amended, focusing on private fund advisers. The proposed rules came in two separate releases from the SEC:

• Private Fund Advisers; Documentation on Registered Investment Adviser Compliance Reviews
• Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies

The proposed rules, taken together and with other recent rulemaking actions by the SEC in recent months,^[1] represent an unprecedented rulemaking season by the SEC and by far the most significant rulemaking proposals directed toward private fund advisers during the tenure of the SEC’s current chairman, Gary Gensler.

The Proposed Rules

The private fund adviser proposal

According to the SEC’s staff, the purpose of the proposed rules under the private fund adviser proposal is to protect private fund investors by increasing their visibility into certain practices, establishing requirements to address practices that have the potential to lead to investor harm, and prohibiting adviser activity that is contrary to the public interest and the protection of investors. The private fund adviser proposal was designed to meet this objective by way of the following proposed rules:

• Quarterly Statement Rule. Provide investors with quarterly statements detailing information about private fund performance, fees, and expenses (applies only to registered private fund advisers).
• Private Fund Audit Rule. Obtain an annual audit for each private fund and cause the private fund’s auditor to notify the SEC upon certain events (applies only to registered private fund advisers).
• Adviser-Led Secondaries Rule. In connection with an adviser-led secondary transaction, distribute to investors a fairness opinion and a written summary of certain material business relationships between the adviser and the opinion provider (applies only to registered private fund advisers).
• Prohibited Activities Rule. Prohibits all private fund advisers from engaging in certain activities and practices that are contrary to the public interest and the protection of investors.
• Preferential Treatment Rule. Prohibits 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.
• Compliance Rules and Books & Records Rules Amendments. Require, respectively, (1) all advisers to retain records related to the proposed rules; and (2) all registered advisers to document the annual review of the adviser’s compliance policies and procedures in writing.

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