SEC Private Fund Adviser Rules: What Made the Cut


Jaqueline Hummel

Publish Date


Compliance Alert

  • Compliance
  • Performance
  • Private Fund

The U.S. Securities and Exchange Commission (SEC) recently voted to adopt new rules and amendments under the Advisers Act originally proposed in February 2022, increasing regulation of private fund advisers. After 18 months of discussion between the SEC, private fund managers, and industry associations, it’s no surprise that there were significant changes between what was proposed and what was adopted.

Below are summaries of the new rules with descriptions of how the adopted rules changed from the original proposals.

Quarterly Statements Rule [Rule 211(H)(1)-2]


The Quarterly Statements Rule requires investment advisers to prepare and distribute quarterly statements for private funds they advise (except for securitized asset funds). The quarterly statement must include a fund table with the following information:

  • The adviser’s compensation, including any fees and other amounts allocated or paid to the adviser or its related persons for the fund, before and after applying offsets, rebates, or waivers
  • Fund-level fees and expenses allocated to, or paid by, the private fund during the fiscal quarter
  • A portfolio-level investment disclosure of all portfolio investment compensation allocated or paid by each covered portfolio company
  • Disclosure regarding calculations (expenses, payments, allocations, rebates, waivers, offsets), and cross references to related documentation such as the private placement memoranda and fund operating documents
  • Standardized fund performance disclosure for liquid funds (annual net returns for 10 years or since inception, average net totals, cumulative net returns for the fiscal year), and for illiquid funds (gross IRR, gross MOIC realized and unrealized, contributions, distributions)

The statements must be current, consolidated (as needed), clear, concise, and consistently formatted.

Differences from the Proposal

The adopted version of the Quarterly Statements Rule includes multiple changes from the proposal as described in more detail below:

  • Illiquid funds – The proposal included six factors for defining an illiquid fund, including a limited life, does not continuously raise capital, limits the investors’ ability to redeem, and does not routinely acquire market-traded investments as part of its strategy. In the final rule, the SEC changed the definition of an illiquid fund to 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. The SEC said that redemption and withdrawal capability represent the distinguishing feature between illiquid and liquid funds.
  • Liquid funds - Instead of requiring advisers to present liquid fund performance since inception, the rule requires only a 10-year lookback.
  • Statement of Contributions and Distributions - The SEC originally proposed that private fund advisers exclude subscription facility fees and expenses from this statement. In the final rule, however, the SEC required both levered and unlevered performance included in the quarterly statement for illiquid funds. In the final release, the SEC said “[a]s we are requiring both levered and unlevered performance to be included in the quarterly statement for illiquid funds under the final rule, advisers should consider including in the statement of contributions and distributions any fees and expenses related to a subscription facility.”
  • Fund Table - The final rule was revised to capture not only amounts “paid by” the private fund, but also fees and expense “allocated to” the private fund during the reporting period. • Portfolio Investment Table - The proposal included a requirement to list the fund’s ownership percentage of each covered portfolio investment. The SEC did not adopt this requirement since it felt it might be misleading to investors.
  • Reporting Period – The proposal required reporting based on calendar periods. The final rule changed the calendar to fiscal periods. Further, the SEC allowed additional time for delivery of fourth quarter statements and for all statements for funds of funds.
  • Records - The proposal required private fund advisers to make and retain records of addresses or the delivery methods used to disseminate quarterly statements. In the final rule, the SEC dropped the requirement that private fund advisers make and retain records of addresses or delivery methods. Instead, they must make and retain a copy of any quarterly statement distributed to fund investors and a record of each address and the date the statement was sent.

Audit Rule [Final Rule 206(4)-10]


The Audit Rule requires that private funds undergo an independent financial statement audit that meets relevant requirements of the Custody Rule. Securitized asset funds are exempt from this requirement. If the adviser does not control the private fund, the adviser is prohibited from advising the private fund unless the adviser takes all reasonable steps to cause the private fund to undergo a financial statement audit and to deliver such statement to investors. With respect to the “all reasonable steps” standard, the SEC suggested that the non-affiliated adviser document its efforts by including, or seeking to include, the requirement in its agreement with the fund adviser.

Interestingly, the SEC acknowledged that an adviser might not be able to distribute a fund’s audited financial statements within the required time frame 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.”

Differences from the Proposal

The SEC had originally proposed a financial statement audit that differed from that required under Rule 206(4)-2, the Custody Rule. In the final release, however, the SEC changes the requirement to conform to the Custody Rule to avoid confusion. In another change from the proposal, the SEC also clarified that if a fund is already undergoing an audit, a non-control adviser (such as a sub-adviser) does not have to take reasonable steps to cause its private fund client to undergo an audit. Finally, unlike the proposal, auditors are not required to notify the SEC in connection with audit issues. To meet the “all reasonable steps” standard, the SEC suggested a sub-adviser that has no affiliation to the general partner of a private fund could document the sub-adviser’s efforts by including (or seeking to include) the requirement in its sub-advisory agreement.

Adviser-Led Secondaries [Final Rule 211(H)(2)-2]


SEC-registered advisers conducting adviser-led secondary transactions must now obtain either a fairness opinion or a valuation opinion and deliver disclosure of any material business relationships between the adviser or its related persons and the independent opinion provider.

Differences from the Proposal

In a change from the proposal, advisers may obtain a fairness opinion or a valuation opinion under the final rule. Additionally, the SEC clarified that the definition of adviser-led secondary transaction does not include tender offers.

Restricted Activities [Final Rule 211(H)(2)-1]


Final rule 211(h)(2)-1 restricts advisers to a private fund from engaging in the following activities, unless they satisfy certain disclosures and, in some cases, consent requirements:

  • Charge or allocate fees or expenses associated with an investigation of the adviser or its related persons by any governmental or regulatory authority to the private fund without getting advance consent from at least a majority in interest of a fund’s non-affiliated investors. A private fund adviser may not charge or allocate fees and expenses for an investigation that results in a court or government authority imposing sanctions for Adviser Act violations.
  • Charge the private fund for any regulatory, examination, or compliance fees or expenses of the adviser or its related persons without providing written notice of the fees and expenses, including the dollar amount involved, on a quarterly basis.
  • Reduce the amount of any adviser clawback by actual, potential, or hypothetical taxes applicable to the adviser, its related persons, or their respective owners or interest holders without providing a written notice to fund investors that includes the aggregate dollar amount of the clawback both before and after reduction for taxes within 45 days of the fiscal quarter in which the clawback occurs.
  • Charge or allocate fees and expenses related to a portfolio investment on a non-pro rata basis when more than one private fund or other client advised by the adviser or its related persons have invested in the same portfolio company, unless the adviser provides disclosure to investors explaining why the allocation is fair and equitable under the circumstances.
  • Borrow money, securities, or other private fund assets, or receive a loan or extension of credit from a private fund client without receiving advance written consent from at least a majority in interest of the fund’s investors, excluding an adviser’s affiliated entities.

Differences from the Proposal

In a change from the proposal, while the restricted activities rule (referred to as the prohibited activities rule in the proposal) prohibited advisers from engaging in certain activities, the final rule includes certain disclosure, and in some cases, consent-based exceptions. Note that the SEC did not adopt the prohibition on fees for unperformed services or the indemnification prohibition because it said such activities should already be prohibited by an adviser’s fiduciary duty and the Advisers Act anti-fraud provisions.

Preferential Treatment [Final Rule 211(H)(2)-2]


The Preferential Treatment Rule prohibits advisers from giving preferential treatment for redemption rights and portfolio holdings or exposure information to certain investors where the adviser reasonably expects such treatment would have a material, negative effect on other investors. All other types of preferential treatment must be disclosed. In the Adopting Release, SEC said it would not make firms go back and amend contractual agreements, including the limited partnership agreement, subscription agreements, and side letters, but will require disclosure of the preferential treatment to other investors. The “legacy treatment” applies only to an adviser’s existing agreements as of the compliance date – so firms cannot add parties to an existing side letter after the compliance date.

Differences from the Proposal

In a change from the proposal, the final rule includes certain exceptions from the redemptions prohibition (i.e., if the redemption right is required by law or offered to all other existing investors) and information prohibition (i.e., if the information is offered to all other existing investors) and limits the proposed requirement to provide advance written notice of preferential treatment to only apply to material economic terms (as opposed to all investment terms).

Documentation of Annual Review [Final Rule 206(4)-7(B)]


The rule requires review and documentation in writing, no less frequently than annually, of the adequacy of the policies and procedures established pursuant to this section and the effectiveness of their implementation…” This rule applies to all registered investment advisers.

Differences from the Proposal

No changes from the proposal.


The SEC’s Private Fund Adviser Rules seek to promote transparency, fairness, efficiency, and competition for private funds. The rules have undergone a good deal of consideration from proposal to enactment. The above summary of differences hopefully clarifies the requirements and specifications that were adopted.

For additional information about the Final Rules and how firms can prepare, please watch our on demand webcast.

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