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The Trend of Increasing Disclosure Obligations for Private Funds Continues in 2022

Last month, the SEC proposed new rules under the Advisers Act that, if implemented, would be the most significant enhancement of disclosure obligations for private fund managers since the Dodd-Frank Act.  Citing investor protection and transparency concerns for limited partners as investors, these proposals signal the Commission’s intent to add additional tools to the fund manager enforcement and examination toolbox.

SEC Chairman Gary Gensler publicly signaled a new direction for the SEC’s regulation of private funds last year.  Previously, regulators had taken a more hands-off approach to private fund regulation in light of participants’ considerable commercial sophistication, reasoning that those parties are capable of protecting their own economic interests.  Chairman Gensler indicated a departure from that view, observing that limited partners are often retirement plans and non-profit or university endowments, behind which “are teachers, firefighters, municipal workers, students, and professors.”  Spotlighting the SEC’s responsibility to “protect[] investors,” “facilitate[e] capital formation,” and “maintain[] fair, orderly, and efficient markets” in the private fund space, Chairman Gensler proceeded to highlight several specific areas where he would instruct SEC staff to consider tightening regulation, such as increasing transparency around fees and expenses, evaluating hedge clauses, and limiting use of side letters.

This year has seen Chairman Gensler’s agenda put into action.  The SEC’s proposed Advisers Act reforms would increase disclosure obligations for private funds.  In particular, they would require additional disclosure by private fund managers on topics including quarterly statements, annual audits, and adviser-led secondary transactions.  The proposed rules would also prohibit certain existing practices (such as accelerated monitoring fees, and certain exculpatory and indemnification provisions), and would require additional disclosure as to certain alleged “preferential treatment” of certain fund investors.

The Commission is also actively advancing its agenda through additional rulemaking and guidance:

  • On January 26, the Commission voted to propose amendments to Form PF that would, among other things, lower the reporting threshold for large private equity advisers from $2 billion to $1.5 billion, and would require rapid reporting—within one business day—of certain events that the Commission believes indicate significant financial stress at a fund. The Commission’s press release touted these amendments as “bolster[ing] the Commission’s regulatory oversight of private fund advisors and its investor protection efforts in light of the growth of the private fund industry.”

  • On January 27, the Division of Examinations issued a risk alert providing observations from examinations of private fund advisers, which included various examples of deficiencies for conduct inconsistent with prior material disclosures, and insufficient fund disclosures regarding performance, marketing, and hedge clauses.

  • On February 10, the Commission proposed significant amendments to Section 13 reporting obligations, which would significantly shorten the filing deadlines for initial and amended Schedules 13D and 13G, as well as provide additional guidance on those filing obligations.

There are also signs of a more rigorous enforcement regime relating to fund manager disclosures.  On January 11, the Commission entered into a settlement order with a wealth management firm for disclosure violations.  Among the order’s fact findings, the SEC highlighted the firm’s use of a hedge clause, containing relatively standard language disclaiming certain causes of action against the adviser, along with its statement that “nothing in this Agreement shall serve to waive or limit any rights Client may have under [federal or state] laws.”  The Commission found that this hedge clause violated Section 206(2) of the Advisers Act, which protects prospective clients from fraudulent or misleading practices.  The order noted that the hedge clause “could lead a client to believe incorrectly that the client had waived a non-waivable cause of action against the adviser provided by state or federal law.”  The order also highlighted the firm’s lack of procedures “to assess a client’s sophistication in the law or to explain the meaning” of the hedge clause, concluding that “there was no evidence this non-waiver disclosure would be comprehended by retail clients.”  Although hedge clauses were just one specific area of concern emphasized in Chairman Gensler’s November 2021 speech, the SEC may be willing to increase regulatory scrutiny over private funds through more aggressive enforcement actions.

Private fund managers and participants should continue to monitor the SEC’s rulemaking and enforcement efforts, and assess their internal policies and procedures against the new benchmarks the SEC provides—benchmarks that are poised to become more rigorous as Chairman Gensler continues to push a more expansive vision of private fund regulation.

Read more of our Top Ten Regulatory and Litigation Risks for Private Funds in 2022.

Dorothy Murray, Joshua M. Newville, Todd J. Ohlms, Seetha Ramachandran, Jonathan M. Weiss, Julia Alonzo, James Anderson, Julia M. Ansanelli, William D. Dalsen, Adam L. Deming, Reut N. Samuels and Hena M. Vora also contributed to this article.

© 2022 Proskauer Rose LLP. National Law Review, Volume XII, Number 97
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About this Author

Partner

Steven Baker is a partner in the Litigation department and a member of the International Arbitration group. He has over 25 years of experience advising clients on complex, often multi-jurisdictional disputes in a wide range of industries, including asset management, technology, life sciences, financial services and defence sectors. He also has extensive experience advising upon and managing disputes for clients involving major technology or telecommunications projects and their financing, technology licensing and misappropriation of trade secrets.

...
+44.20.7280.2238
Margaret A Dale, Commercial Litigation, Proskauer Rose Law Firm
Partner

Margaret Dale is a Partner in the Litigation Department, resident in the New York office. Her practice focuses on commercial litigation, including class action defense, as well as intellectual property, privacy and data security, corporate governance litigation, securities litigation, and regulatory and internal investigations. She also represents and counsels clients in art law matters. 

212.969.3315
Michael R. Hackett, Litigation Attorney, Proskauer Law Firm
Associate

Michael R. Hackett is an associate in the Litigation Department and a member of the Asset Management Litigation practice. His practice focuses on disputes and regulation involving private funds, including private equity, venture capital, hedge, real estate and private credit funds, as well as other limited partnerships, where he regularly advises funds, fund sponsors, investment advisers and institutional and individual investors.

Mike’s experience representing private fund clients runs the gamut, from control contests within advisers, to...

617-526-9723
William Komaroff Litigation White Collar Attorney Proskauer Law Firm New York
Partner

Bill Komaroff is a partner in the Litigation Department and White Collar Practice Group. He has a nationwide federal practice focused on corporate defense and investigations, counseling and defending institutional and individual clients in connection with a broad array of complex government investigations, prosecutions and civil disputes.

Bill also has served as a member of the Criminal Justice Act Panel for the District Court for the Southern District of New York.

From 2003 to 2007, Bill served as an Assistant U.S....

212-969-3975
Kirsten Lapham FInancial Services Attorney Proskauer Rose Law Firm, United Kingdom
Partner

Kirsten Lapham is a partner specialising in financial services regulation. She advises a broad range of both institutional and individual clients on a variety of financial services regulatory and compliance issues. Her practice has a specific emphasis on the regulatory issues arising under the AIFMD, and MiFID II for a range of EU and indirectly impacted firms outside of the EU.

Experience in this area includes advising multiple clients on the EU marketing and registration regimes and overlaying local regulatory considerations, such as the U.K. retail distribution...

+44.20.7280.2031
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