Private Fund Restricted Activities and Preferential Treatment Rules Breakdown


ACA Group

Publish Date



  • Private Fund
  • SEC
  • Compliance

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 Restricted Activities Rule focuses on transparency, disclosures, and consent while the Preferential Treatment Rule bans private fund advisers from providing preferential information to investors. Below is a breakdown of each rule.

Restricted Activities Rule

New Rule 211(h)(2)(1) applies to all private fund advisers, regardless of registration status. The new rule focuses on transparency, disclosures, and in some cases, consent before a private fund adviser does the following:

  • Uses fund assets to pay fees or expenses for an investigation of the adviser or its related persons by any governmental or regulatory authority (permitted with disclosure and consent).
    • Charging the costs associated with a government investigation to the fund is only permitted if more than fifty percent of non-affiliated investors consent. Consent of a Limited Partners Advisory Committee is not sufficient under this rule.
    • Private fund advisers are banned from charging costs associated with an investigation resulting in sanctions for violating the Advisers Act.
  • Uses fund assets to pay any regulatory or compliance fees or expenses, or fees or expenses associated with an examination, associated with the adviser or its related persons (permitted with disclosure after the fact).
    • Fees and costs for regulatory compliance may be charged to a fund if the adviser distributes disclosure of fees, including the amount, within 45 days after the end of the fiscal quarter. This disclosure can be included in the quarterly reports, and must include not only fees charged, but allocated to the fund.
  • Collects a clawback net of taxes applicable to the adviser, its related persons, or their respective owners or interest holders (permitted with disclosure after the fact).
    • Clawbacks are allowed if written notice is provided to investors disclosing the amount of the clawback before and after any tax reduction within 45 days after the end of the fiscal quarter. Disclosures can be included in the quarterly report.
    • The new rule clarifies that performance-based compensation includes allocations, payments, or distributions of profit.
  • Allocates fees and expenses related to a portfolio investment (or potential portfolio investment) on a non-pro rata basis among funds and other clients (permitted with disclosure and explanation of why allocation is fair and equitable before the fact).
    • Fees and expenses must be disclosed to investors before they are charged, and the adviser must provide an explanation about why the allocation is fair and equitable.
  • Borrows from another fund managed by the adviser (permitted with disclosure and consent).
    • The final rule requires an adviser to receive advance written consent beforehand from at least a majority in interest of a fund’s investors that are unrelated to the adviser. The notice must describe the material terms of the borrowing. The SEC suggested that this notice include the amount to be borrowed, the interest rate, and the repayment schedule.

The SEC also made changes to the recordkeeping requirements under the Advisers Act Recordkeeping Rule (Rule 204-2), requiring that private fund advisers retain a copy of any notification, consent, or other document distributed to or received from private fund investors under this rule, along with a record of each addressee and the corresponding date(s) sent for each such document distributed by the adviser.

Preferential Treatment Rule

New Rule 21(h)(2)-3 bans private fund advisers from providing preferential information to investors if the information is expected to have a material negative effect on other investors in the fund or similar pool of assets, or the information is offered to all other investors in the fund or similar pool of assets at the same time.

The SEC grandfathered existing preferential redemption and information rights agreements in place prior to the compliance date.

For preferential treatment not prohibited under the private funds rule, the adviser must provide advance written notice to prospective investors of preferential treatment regarding material economic terms (for example, the cost of investing, liquidity rights, fee breaks and co-investment rights) given to other investors.

  • For current investors, the adviser must provide written notice of preferential treatment.
  • For illiquid funds, the adviser must provide disclosure at the end of the fundraising period.
  • For liquid funds, the adviser must provide disclosure following the investor’s investment.

An annual written notice reflecting preferential treatment provided since the last written disclosure must be sent to all fund investors.

The Advisers Act Recordkeeping Rule (Rule 204-2) was amended to require advisers to retain copies of all written notices sent to current and prospective investors in a private fund under the Preferential Treatment Rule. Advisers must retain copies of a record of each addressee and the corresponding dates sent.

Our guidance

The compliance dates for these rules may not be until September 14, 2024 for large advisers (>$1.5B) and March 14, 2025 for small advisers (<$1.5B), 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 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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