SEC Proposes New Protections for Private Fund Investors

New rules and amendments would enhance regulation of private fund advisors

The U.S. Securities and Exchange Commission (SEC) voted on Feb. 9, 2022, to propose new rules and amendments under the Investment Advisers Act of 1940 that would enhance the regulation of investment advisors to private funds. The goal is to protect private fund investors by increasing transparency, competition, and efficiency in a market that is now worth about $18 trillion.

In a press release, SEC Chair Gary Gensler stated: "Private fund advisers, through the funds they manage, touch so much of our economy. Thus, it's worth asking whether we can promote more efficiency, competition, and transparency in this field. I support this proposal because, if adopted, it would help investors in private funds on the one hand, and companies raising capital from these funds on the other."

Key Takeaways

  • The SEC is proposing various new rules to protect investors in private funds.
  • These rules are designed to enhance disclosures from investment advisors to private funds, as well as to prohibit certain activities.
  • The SEC is soliciting public comment on its proposed rules.

Details of the Proposed Rules

The proposed rules seek to increase transparency by requiring registered private fund advisers to give investors quarterly statements that disclose detail on fund fees, expenses, and performance.

The proposed rules would prohibit private fund advisors, whether or not they are registered with the SEC, from giving certain types of preferential treatment to certain investors in their funds. In cases where preferential treatment is allowed, it must be disclosed to current and prospective investors alike.

The proposed rules would create new requirements for private fund advisors related to fund audits, books and records, and advisor-led secondary transactions.

The SEC also is proposing amendments to the Investment Advisers Act of 1940 compliance rule that would require all registered advisors, including those that do not advise private funds, to document the annual review of their compliance policies and procedures in writing.

Listed below are several categories of activities that the SEC proposes to prohibit among private fund advisors.

Proposed Prohibited Activities

The proposal rules would prohibit all private fund advisors from engaging in a variety of activities. One set of prohibitions would include seeking reimbursement, indemnification, exculpation, or limitation of liability for certain activities.

A second set of prohibitions would include charging certain fees and expenses to a private fund or its portfolio investments, such as fees for unperformed services and fees associated with an examination or investigation of the advisor.

A third set of prohibitions would include reducing the amount of an advisor clawback by the amount of certain taxes.

A fourth set of prohibitions would include charging fees or expenses related to a portfolio investment on a non-pro rata basis.

A fifth set of prohibitions would include borrowing or receiving an extension of credit from a private fund client.

Public Comment Period

The public comment period will be open for 60 days following publication of the proposing release on the SEC's website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

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  1. U.S. Securities and Exchange Commission. "SEC Proposes to Enhance Private Fund Investor Protection." Accessed Feb. 9, 2022.

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