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Volume XII, Number 182

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SEC Proposes Sweeping Amendments to the Advisers Act for Private Fund Advisors

On February 9, 2022, the Securities and Exchange Commission (the SEC) issued proposed rules under the Investment Advisers Act of 1940, as amended (Advisers Act), for investment advisers to private funds registered under the Advisers Act. If adopted, the proposed rules represent significant changes to the rules applicable to private fund advisers, and indicate a continued focus on private funds and their advisers by the SEC.

The proposed rules would require that advisers:
(1) distribute quarterly statements to investors disclosing certain detailed information regarding fees, expenses and performance; (2) obtain annual audits of the financial statements of the private funds they manage, in accordance with generally accepted accounting principles (GAAP) by an independent public accountant, and require such accountant to notify the SEC of certain material events; (3) in connection with certain adviser-led secondary transactions, obtain and distribute to investors a fairness opinion; and (4) document annual compliance reviews in writing.

In addition, the proposed rules would also contain a set of prohibitions applicable to all investment advisers to private funds—regardless of whether registered with the SEC, exempt from registration, or prohibited from registration. Advisers would be prohibited from:

  • charging fees to a portfolio investment for any services the adviser does not, or does not reasonably expect to, provide to the portfolio investment (i.e., accelerated payments);

  • charging fees or expenses to a private fund associated with government or regulatory examinations or investigations, and regulatory and compliance fees and expenses of the adviser or its related persons;

  • reducing the amount of any ‘adviser clawback’ (i.e., a return of performance fees by the adviser and/or its affiliates) by the amount of certain taxes;

  • seeking reimbursement, indemnification, exculpation, or limitation of liability from a private fund for an adviser’s wrongful conduct including but not limited to for breach of fiduciary duty (i.e., hedge clauses);

  • charging or allocating fees and expenses related to a portfolio investment on a non-pro rata basis, when multiple other clients of the adviser and its related persons have invested or propose to invest in the portfolio investment;

  • borrowing money, securities or other assets, or receiving an extension of credit from a private fund; and

  • providing certain types of preferential terms to investors (for example, side letters), including preferential liquidity or enhanced portfolio information, absent certain written disclosures to prospective and current investors.

A detailed analysis of the proposed rules is forthcoming.

© 2022 Vedder PriceNational Law Review, Volume XII, Number 108
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About this Author

 Robert M. Crea Investment Services Attorney Vedder Price San Francisco, CA
Shareholder

Robert M. Crea is a Shareholder at Vedder Price and a member of the firm’s Investment Services group in the San Francisco office.

Mr. Crea counsels investment advisers, private fund managers and broker-dealers on a variety of fund formation, product structuring, regulatory and compliance, performance presentation and securities law matters. He regularly works with clients to structure and document U.S. and offshore private investment funds and assists clients with a variety of state and federal regulatory and compliance issues. He represents pension plans and other institutional...

415-749-9504
Rachel Behar Investment Fund Attorney Vedder Price New York
Associate

Rachel Behar is an Associate in Vedder Price’s New York office and a member of the firm’s Investment Services group.

Ms. Behar concentrates her practice on representing private and registered investment funds, investment advisers, broker-dealers and financial institutions in a variety of legal, regulatory, formation, governance and compliance matters. She frequently assists private equity clients in fund formation matters, and works with them to structure and document private investment fund complexes.

Ms. Behar has...

212-407-7641
Joseph Mannon Investment Lawyer Vedder Price Law Firm
Shareholder

Joseph M. Mannon is Chair of Vedder Price's Private Fund Formation group and a member of the firm's Investment Services group.

Mr. Mannon focuses his practice on legal and compliance matters for investment advisers, mutual funds, closed-end funds and unregistered vehicles such as hedge funds, hedge fund of funds, and other investment entities.  With regard to unregistered vehicles, he frequently counsels clients on fund formation and structuring matters for funds organized both in the United States and abroad.  He also counsels clients on issues relating to commodity trading...

312-609-7883
Jeff VonDruska Investment Services Lawyer Vedder Price Law Firm
Shareholder

Jeff VonDruska is a Shareholder in the Chicago office of Vedder Price and a member of the firm’s Investment Services practice group.

His practice includes the representation of investment advisers, family offices, private funds, registered mutual funds, closed-end funds, exchange-traded funds and other financial institutions on a broad range of legal, regulatory, governance, formation and compliance matters.

Mr. VonDruska has significant experience in regulatory and compliance matters affecting investment advisers, including registration and marketing. He also counsels...

312-609 7563
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