The Securities and Exchange Commission (SEC) adopted new rules and amendments under the Investment Advisers Act of 1940 (Advisers Act) to enhance the regulation of private fund advisers. The new rules require private fund advisers registered with the SEC to:

• Provide investors with quarterly statements detailing information regarding private fund performance, fees, and expenses;

• Obtain an annual audit for each private fund; and

• Obtain a fairness opinion or valuation opinion in connection with an adviser-led secondary transaction.

Details of the Impact to Registered Private Fund Advisers:

1. Quarterly Statement Rule. The reforms require registered private fund advisers to distribute a quarterly statement to private fund investors. The statement must disclose fund-level information regarding performance, the cost of investing in the private fund, fees and expenses paid by the private fund, as well as certain compensation and other amounts paid to the adviser.

2. Private Fund Audit Rule. The reforms require registered private fund advisers to cause the private funds they advise to undergo a financial statement audit that meets the requirements of the audit provision in the Advisers Act custody rule (rule 206(4)-2)). These audits will provide an important check on the adviser’s valuation of private fund assets and protect private fund investors against the misappropriation of fund assets.

3. Adviser-Led Secondaries Rule. The reforms require a registered private fund adviser to obtain a fairness opinion or a valuation opinion when offering existing fund investors the option between selling their interests in a private fund and converting or exchanging their interests in the private fund for interests in another vehicle advised by the adviser or any of its related persons. The rule also requires the adviser to prepare and distribute to the private fund’s investors a summary of any material business relationships the adviser has, or has had within the prior two years, with the independent opinion provider. This requirement will provide a check against an adviser’s conflicts of interest in structuring and leading such transactions.

4. Books and Records Rule Amendments. To facilitate the Commission’s ability to assess an adviser’s compliance with the rules, the reforms include amendments to the books and records rule under the Advisers Act for registered private fund advisers.

5. Compliance Rule Amendments. The reforms include amendments to the compliance rule under the Advisers Act requiring all registered advisers, including those that do not advise private funds, to document in writing the required annual review of their compliance policies and procedures. Written documentation of the annual review will help the Commission to determine advisers’ compliance with the with the rules and identify potential compliance program weaknesses.

These updates are aimed to further enhance the existing regulation and provide protection to investors in private funds and the public alike. Exposure to private funds continues to grow as many individuals have indirect exposure through retirement plans, pension funds, and various other private investments.

For more information or to speak with an expert regarding how we can assist you with the updated SEC regulations, please contact Brandon Caroprese at bcaroprese@caroprese.com or via telephone at 973-475-8090.  The above information was sourced directly from the SEC’s public announcement.