Adviser-led Secondaries, Annual Fund Audits, and Annual Compliance Review Documentation Breakdown

New Rules 211(h)(2)(1) and 21(h)(2)-3 were adopted by the U.S. Securities and Exchange Commission (SEC) on August 24, 2023, along with the rest of the Private Fund Adviser Rules. The Adviser-led Secondaries Rule requires advisers to obtain an independent fair or valuation opinion while the Annual Fund Audits Rule requires advisers to obtain audits of their private funds annually and upon liquidation. Amended Rule 206(4)-7 requires that SEC-registered advisers document their review of the adequacy of their compliance policies and procedures and the effectiveness of their implementation efforts. Below is a breakdown of each rule.

Adviser-led Secondaries

New Rule 211(h)(2)-2 defines an “adviser-led secondary transaction” as any transaction where a fund’s investors are offered two options, first to sell all or a portion of their interests in the fund, and second to convert (or exchange) all or a portion of their fund interests into interests in another vehicle managed by the adviser or its related persons.

In a softening from the proposed rule, the adviser is required to obtain an independent fair or valuation opinion. Additionally, the adviser must distribute a written summary of any material business relationships between it and the independent opinion provider. Whether a business relationship is “material” requires a facts and circumstances analysis; however, for purposes of the rule, audit, consulting, capital raising, investment banking, and other similar services would typically meet this standard.

The SEC also made changes to the recordkeeping requirements under Rule 204-2 of the Advisers Act, requiring advisers to maintain a copy of any fairness opinion or valuation opinion and material business relationship summary distributed under this rule, along with a record of each addressee and the corresponding date(s) sent.

Annual Fund Audits

New Rule 206(4)-10 requires SEC-registered private fund advisers to obtain audits of their private funds annually and upon liquidation. Securitized asset funds are excluded from this requirement. In a change from the proposed rule, the audit requirement conforms to the Custody Rule (Advisers Act Rule 206(4)-2) audit requirements. If an adviser does not control the fund (e.g., unaffiliated sub-adviser), the adviser must take all reasonable steps to ensure that the audit takes place (assuming the fund is not already being audited). The SEC suggested including audit requirements in sub-advisory agreements. In another change from the rule proposal, the SEC dropped the requirement that auditors notify the SEC in connection with any issues arising under the audit.

This new rule means that private fund advisers can no longer use surprise audits to comply with the custody rule. Moreover, the SEC rejected requests to waive the annual audit requirement for newly formed or liquidating entities, meaning that funds will incur expenses associated with audits for stub period and liquidation audits.

Interestingly, the SEC acknowledged that there may be situations where an adviser might not be able to distribute a fund’s audited financial statements by the relevant deadline because of unforeseen circumstances. In the Final Release, the SEC said that “if an adviser is unable to deliver audited financial statements in the timeframe required under the mandatory private fund adviser audit rule due to reasonably unforeseeable circumstances, this would not provide a basis for enforcement action so long as the adviser reasonably believed that the audited financial statements would be distributed by the deadline and the adviser delivers the financial statements as promptly as practicable.”

The Advisers Act Recordkeeping Rule (Rule 204-2) has been amended to require advisers to keep a copy of any audited financial statements, along with a record of each addressee and the corresponding date(s) sent.

Annual Compliance Review Documentation

Amended Rule 206(4)-7 requires that SEC-registered advisers document their review of the adequacy of their compliance policies and procedures and the effectiveness of their implementation efforts. While most SEC registered advisers already document such reviews, this change may cause SEC examiners to closely scrutinize whether the reviews (i) clearly demonstrate why an adviser’s implementation of a policy is adequate; (ii) critically identify deficiencies uncovered; and (iii) present action-oriented plans to remedy any such deficiencies. Advisers should get ready - this rule amendment became effective 60 days after its publication in the Federal Register.

Our guidance

Some of the compliance dates for these rules have past while others are not until September 14, 2024 or March 14, 2025. If you have not already begun planning, you should start now.

Given this massive effort, many firms should consider leveraging compliance consulting support, outsourced managed services, and regulatory technology and data analytics to help ease the burden of compliance.

Access our Private Fund Adviser Rules library

We've created a number of resources and insights to help you decipher the Private Fund Adviser Rules and navigate your path forward toward compliance. Visit our resource library here.

How we help

The Private Fund Adviser Rules require substantial implementation efforts with varying deadlines, the implications of which private fund advisers should begin considering and planning for now. This includes undertaking readiness assessments and developing detailed project plans to manage all the changes and interdependencies. 

Our people, processes, and technology can help simplify this task and help address all six of the new rules with:

• Private Fund Adviser Rule Readiness Assessment: Our tailored solution is designed to evaluate your firm's compliance program and investor reporting for alignment with these new rules.
• Quarterly Statements Solutions: Our tailored quarterly statement solutions help you navigate the complicated process and specifics around what is shown on these statements and how it must be calculated.
• ACA Signature: Our customized solutions combine compliance advisory, innovative technology, and managed services to provide expert solutions to assist firms with rule interpretation as well as modification and implementation of a firm’s compliance program.

Reach out to your ACA consultant or contact us to find out how we can help your firm comply with these rules.

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