The U.S. Securities and Exchange Commission (SEC) recently adopted new rules and rule amendments under the Investment Advisers Act of 1940, as amended (the Advisers Act) that will increase the regulation of private fund advisers. The rules are aimed toward three of the SEC's stated enforcement priorities concerning investor protection and risk: (1) transparency, (2) conflicts of interest, and (3) governance mechanisms. Like most recent rules, the SEC approved them on a 3-2 vote along partisan lines.
Taken as a whole, these rules mark a significant shift in the SEC's regulatory efforts and a corresponding increase in the compliance burdens of investment advisers. While some of the new rules will apply only to SEC registered private fund advisers, others will apply to all private fund advisers.
The SEC's adopting release is 660 pages long and has more than 1,900 footnotes. Accordingly, the following is necessarily only a brief overview of the rules and their implications for all private fund advisers.
REGISTERED PRIVATE FUND ADVISERS
To address a perceived a lack of transparency in the practice of private fund advisers, as well as to provide a check on advisers' potential conflicts of interest in structuring deals, the new rules impose the following requirements, among others, on registered fund advisers:
Quarterly Statement Rule
Registered private fund advisers must distribute to investors quarterly statements disclosing fund-level information regarding fund performance, private fund investing costs, fees and expenses paid by the private fund, and certain other compensation and amounts paid to the adviser.
Private Fund Audit Rule
Any private funds under advisement by a registered fund adviser must undergo a financial statement audit, in accordance with the Advisers Act "custody rule."
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