SEC Private Fund Rules 

Is your organization prepared to comply with the new SEC private fund rules?

The Securities and Exchange Commission (SEC) has adopted sweeping new rules under the Investment Advisers Act of 1940 that will significantly change how private fund advisers report, disclose, manage, and interact with investors.

These regulations will require private funds advisers to make adjustments across many aspects of their business. Those that have not already done so should immediately begin preparing to integrate the regulations into their compliance programs.

In this article:

• Understanding the SEC Private Fund Rules
• Axiom: Your Partner in SEC Compliance
• SEC Private Fund Rules FAQ
• Regulatory & Compliance Lawyers for Financial Services

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The new SEC private fund rules were approved in August 2023 in furtherance of its ongoing campaign to more closely and comprehensively regulate the $20 trillion private funds industry and ultimately bring it in line with investment vehicles more common in the retail investor market. 

The Rules fall into five broad categories: Quarterly Statement Rule, Audit Rule, Adviser-Led Secondaries Rule, Restricted Activities Rule, and Preferential Treatment Rule.

• Quarterly Statements: The new rules require SEC-registered advisers to provide investors with quarterly information about private fund adviser compensation, fund fees and expenses, and performance.
• Annual Audit: Under the new rules, SEC-registered advisers must cause each private fund they handle to undergo a yearly audit as outlined in the custody rule (Advisers Act rule 206(4)-10). These audited financial statements must be delivered to investors.
• Adviser-Led Secondaries: The new SEC private funds rules require registered advisers that engage in adviser-led secondary transactions to 1) obtain and distribute a fairness or valuation opinion and 2) provide a summary of any material business relationships between the adviser or its related persons and the independent opinion provider.
• Restricted Activities: The rules restrict advisers from engaging in certain activities, including (among others) charging or allocating certain fees and expenses to private funds, unless the adviser meets certain disclosure and, in some cases, consent-based exceptions.
• Preferential Treatment (e.g., “Side Letters”): The new rules prohibit advisers from granting preferential redemption or information rights about portfolio holdings that would have a material, negative effect on other investors in the private fund or a similar pool of assets. For all types of preferential treatment, they must 1) provide advance written notice to prospective investors of preferential treatment related to any material economic terms and 2) provide timely after-the-fact and annual written notices to current investors of all preferential treatment.
  
  

The new SEC private funds rules obligate registered advisers to retain books and records related to each of the above requirements. The agency has also amended the Compliance Rule (Advisers Act rule 206(4)-7) to require that all advisors, regardless of registration, provide written documentation of their annual compliance review.

The new SEC private fund rules became effective on November 13, 2023, and all advisers (regardless of registration) were required to comply with the amended Compliance Rule as of that date. SEC-registered advisers with more than $1.5 billion in AUM will have until September 14, 2024, to comply with the Adviser-Led Secondaries, Preferential Treatment, and Restricted Activities Rules, while those with less than $1.5 billion in AUM will have until March 14, 2025, to come into compliance. March 14, 2025, is also the compliance date for the Quarterly Statement and Audit Rules.

Complying with the new SEC private funds rules will impose a significant burden on impacted investment advisors at a time when many are already facing pressure to reduce expenses.

Axiom can help.

With over 20 years of experience in meeting the unique resourcing needs of modern legal departments, we are dedicated to helping our clients control costs, achieve efficiency, and readily adapt to today's rapidly evolving regulatory landscape. With access to an extensive pool of highly skilled legal professionals, Axiom can connect your organization with regulatory and compliance attorneys who possess the relevant knowledge and experience to seamlessly navigate the complexities of the new SEC private funds rules.

• Regulatory Compliance Advisory: Providing comprehensive guidance on interpreting and adhering to the new regulations.
• Policy and Procedure Development: Crafting robust policies and procedures tailored to comply with each of the new private funds rules.
• Training and Education: Playbook creation to leverage when educating staff members on the amended regulations.
• Implementation Support: Assisting with the practical implementation of the rules’ new requirements.
  

When you partner with Axiom, you never have to compromise your highest standards.

Axiom attorneys have an average of 15 years of experience and include Fortune 500 and Am Law 200 firms, as well as graduates from a U.S. News & World Report Top 50 Law School.

Our deep bench of legal talent will allow us to tailor a customized solution that aligns with your organization’s unique needs, culture, and goals. You can engage one or more attorneys on a full- or part-time basis, either onsite or remotely, for as long as needed. While your in-house team will supervise your Axiom lawyer's day-to-day work, we'll partner with you throughout onboarding to ensure they meet your expectations from day one.