On August 23, 2023, the Securities and Exchange Commission (“SEC”) adopted multiple new rules that will impact the operations of both registered and exempt investment advisers to private funds by, among other things, requiring such advisers to document their annual compliance program reviews, requiring and specifying the contents of quarterly reporting provided to private fund investors, restricting advisers to private funds from engaging in certain activities ranging from charging certain fees to seeking indemnification from such funds without disclosure and, in some cases, investor consent, requiring that advisers procure “fairness opinions” from third parties prior to leading secondary transactions, and restricting advisers from granting their investors certain types of preferential treatment (via side letters or otherwise) without disclosing such treatment to all investors in the applicable fund. The SEC also amended Rule 204-2 (the “Books and Records Rule”) and Rule 206(4)-7 (the “Compliance Program Rule”).
Although the new rules will certainly affect advisers and be a significant change from past requirements, the SEC did scale back the final rules from the more aggressive proposal in January 2022. Certain absolute prohibitions included under the proposed rule are now “restrictions” that, for example, permit advisers to seek indemnification or allocate expenses other than pro rata if adequate disclosure is provided and consent is received, where applicable.
A practical reference guide of the new private fund rules can be viewed by downloading the attached document.