Private Fund Quarterly Statement Rule Breakdown
New Rule 211(h)(1)-2 was adopted by the U.S. Securities and Exchange Commission (SEC) on August 24, 2023, along with the rest of the Private Fund Adviser Rules. This rule requires SEC-registered private fund advisers to prepare and distribute a quarterly statement that includes information regarding fees, expenses, and performance to the private fund’s investors. The goal of the new rule is to provide clear and simple disclosures to existing investors, so investors better understand their private fund investments. The Quarterly Statement Rule is broken out into 6 sections:
Fee and expense disclosure
The rule requires an investment adviser to prepare and distribute quarterly statements that include information regarding the fund’s fees and expenses and any compensation paid or allocated to the adviser or its related persons of the fund.
- Private Fund Level Disclosure: At the total fund level, the rule requires private fund advisers to disclose in a table format:
- Adviser Compensation (i.e., all compensation, fees, and other amounts allocated or paid to the adviser or any of its related persons)
- Fund Expenses (i.e., all fees and expenses allocated to or paid by the private fund)
- Offsets and Rebates (i.e., any offsets or rebates carried forward during the reporting period to subsequent quarterly periods to reduce future payments or allocations)
- Portfolio Investment-Level Disclosure: The rule also requires advisers to disclose all portfolio investment compensation allocated or paid by each covered portfolio investment in a single table during the reporting period. Advisers are also required to disclose portfolio level compensation (i.e., management, consulting, monitoring, servicing, transaction, administrative, advisory, closing, disposition, similar fees)
- Note: The adviser is required to list the portfolio investment level compensation before and after the application of offsets, rebates, or waivers.
- Calculations and Cross-References to Offering Documents: To help investors find additional information on any fee or expense disclosure, the quarterly statements must include cross-references to the relevant sections of the private fund’s offering and organizational documents.
The rule requires advisers to show standardized fund performance in each quarterly statement. The required fund performance will differ between liquid and illiquid funds.
- Liquid Funds: Defined as any private fund that is not an illiquid fund (i.e., allows voluntary redemptions/withdrawals). Advisers are required to show:
- Net Total Return on an annual basis for the 10 fiscal years prior to the quarterly statement or since the fund’s inception (whichever is shorter)
- Annualized Net Total Return over one-, five-, and 10- fiscal year periods
- Cumulative Net Total Return for the current fiscal year (i.e., Year-to-Date) as of the end of the most recent fiscal quarter
- Illiquid Funds: Defined as a private fund that (i) is not required to redeem interests upon an investor’s request and (ii) has limited opportunities, if any, for investors to withdraw before termination of the fund. Advisers are required to show:
- Gross and net since inception internal rate of return and gross and net multiple of invested capital for the total fund. Both must be computed with and without the impact of fund-level subscription facilities, if applicable.
- Gross internal rate of return and gross multiple of invested capital for the realized and unrealized portions of the illiquid fund’s portfolio, shown separately.
- Statement of Contributions and Redemptions (i.e., the aggregate cash inflows from investors and the aggregate cash outflows from the fund to investors, along with the fund’s net asset value)
- Prominent Disclosure of Performance Calculation Information: The rule requires advisers to include prominent disclosure of the criteria used and assumptions made in calculating the performance for the fund being shown. The disclosures must be readily noticeable and included within the quarterly statement.
Preparation and distribution of quarterly statements
The rule requires quarterly statements to be prepared and distributed on a timely basis.
- Funds that aren’t Fund of Funds (i.e., most funds): Quarterly statements are due 45 days after the first three fiscal quarter ends of each fiscal year and 90 days after the end of each fiscal year.
- Fund of Funds: Quarterly statements are due within 75 days after the first three fiscal quarter ends of each year and 120 days after the fiscal year end.
- Newly Formed Private Funds: The rule requires a quarterly statement to be distributed beginning after the fund’s second full quarter of operating results.
- If a quarterly statement is distributed electronically through a data room, this distribution, like other electronic deliveries, should be done in accordance with the SEC’s guidance regarding electronic delivery.
Consolidated reporting for certain fund structures
The rule requires advisers to take a principles-based approach to consolidate reporting for similar pools of assets to the extent doing so provides more meaningful information to the private fund’s investors and is not misleading.
For example, this may be applicable for master-feed structures, where the adviser typically advises and controls all three funds, and the master fund typically makes and holds the investments. The rule would require the adviser to provide feeder fund investors with a single quarterly statement covering the applicable feeder fund and the feeder fund’s proportionate interest in the master fund on a consolidated basis, if it is not misleading.
Format and content requirements
The rule requires the adviser to use clear, concise, plain English in the quarterly statement.
- Advisers should use a reasonable font size that is legible, margins and paper sizes that are reasonable (if applicable), and present information to facilitate review from one quarterly statement to the next.
- If an adviser chooses to include additional information in the quarterly statement (i.e., information that is not required by the rule), this information must be as short as practicable and not be more prominent than the required information.
Recordkeeping for quarterly statements
The SEC amended Rule 204-2 (Books and Records Rule) under the Advisers Act to require advisers to retain books and records related to the quarterly statement rule.
- Advisers must make and retain a copy of any quarterly statement distributed to fund investors including the addressee and the date(s) the statement was sent.
- Advisers must make and retain all records evidencing the calculation method for all expenses, payments, allocations, rebates, offsets, waivers, and performance listed on any quarterly statement.
- Advisers must make and keep books and records substantiating the adviser’s determination that a private fund client is a liquid fund or an illiquid fund.
The compliance date for the Quarterly Statement Rule may not be until March 14, 2025, but compliance will likely require extensive implementation efforts for most firms. Private fund advisers should begin planning now.
Given this massive effort, many firms should consider leveraging compliance consulting support, outsourced managed services, and regulatory technology and data analytics.
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.