SEC Proposes Sweeping Changes Affecting Private Fund Managers

Publish Date


Compliance Alert

  • Compliance
  • Private Fund

On February 9, 2022, the U.S. Securities and Exchange Commission (SEC) proposed five new rules as well as amendments to Rules 204-2 and 206(4)-7 under the Investment Advisers Act of 1940, as amended (the Advisers Act). According to the SEC, these proposals are designed to address "concerns that arise out of the opacity that is prevalent in the private fund structure."

Quarterly Statements

Proposed rule 211(h)(1)-2 would require registered investment advisers to distribute quarterly statements to private fund investors within 45 days after each calendar quarter end. The requirement to distribute such statements would begin after a fund’s second full calendar quarter of generating operating results. The proposed rule would require the statements to contain standardized disclosures pertaining to fees and expenses and performance, as set forth below. Disclosures would be required to be in plain English and presented in a format that facilitates review from one statement to the next. Further, the rule would require consolidated reporting of related funds (e.g., master-feeder arrangements) to the extent that doing so would provide more meaningful information to fund investors.

Private Fund-Level Fees and Expenses

The statements would have to contain a detailed accounting of all compensation received by the adviser or any of its related persons from the private fund during the reporting period (e.g., management fees, incentive fees, administration fees, etc.), as well as a detailed accounting of all other fees and expenses paid by the private fund (e.g., administrator expenses, audit fees, insurance premiums, etc.). The aforementioned fees and expenses would have to be disclosed both before and after the application of any offsets, rebates, or waivers, along with the amount of any offsets or rebates carried forward during the reporting period.

Portfolio Investment-Level Fees and Expenses

The statements would have to contain a detailed accounting of all portfolio investment compensation (e.g., origination fees, consulting fees, monitoring fees, etc.) during the reporting period with separate line items for each category of compensation, and the ownership percentage of each covered portfolio investment as of the end of the reporting period.


In the case of “liquid funds” (defined by the rule), the statements would have to show, with equal prominence, performance based on net total return on an annual basis since the fund’s inception, average annual net total returns over one-, five-, and ten-calendar year periods (to the extent applicable), and cumulative net total return for the current calendar year as of the end of the most recent calendar quarter. For “illiquid funds” (also defined in the rule), the statements would have to show, with equal prominence, gross internal rate of return (IRR), gross multiple of invested capital (MOIC), net IRR, and net MOIC since inception of the fund as of the most recent calendar quarter (or the most recent practicable date), without the impact of any fund-level subscription facilities (including the impact of associated fees and expenses when calculating net performance). Such statements would have to include a statement of contributions and distributions that reflects the aggregate cash inflows from and outflows to investors, as well as the fund’s net asset value.

Both types of funds would be required to include prominent disclosure within the statement regarding the criteria used and assumptions made in calculating the relevant performance results.

Prohibited Activities

Proposed rule 211(h)(2)-1 would prohibit any adviser to a private fund (regardless of whether they are currently or are required to be registered with the SEC) from engaging in the following activities directly or indirectly:

  • Charging portfolio investment fees for any monitoring, consulting, servicing, or other services that the adviser does not, or does not reasonably expect to, provide (i.e., "accelerated payments”) unless the economic benefit is 100% shifted to the fund’s investors through an offset, rebate, or other mechanism and no excess fees are retained by the adviser.
  • Charging a private fund for fees or expenses incurred in connection with an examination or investigation of the adviser or its related persons by any governmental or regulatory authority, as well as regulatory and compliance fees and expenses of the adviser or its related persons.
  • Reducing 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.
  • Seeking reimbursement, indemnification, exculpation, or limitation of its liability by the fund or its investors for breach of fiduciary duty, willful malfeasance, bad faith, negligence (including ordinary negligence), or recklessness in providing services to the fund.
  • Charging or allocating fees and expenses, including so-called “broken deal” expenses, related to an actual or potential portfolio investment on a non-pro rata basis when multiple clients, including co-investment vehicles, advised by the adviser or its related persons have invested or propose to invest in the same portfolio investment.
  • Borrowing fund assets or receiving a loan or other extension of credit from a fund.

Notably, all of the above prohibitions would apply irrespective of whether they have been disclosed to investors, whether they are permitted by the fund’s governing documents, or whether the investors or representatives acting on their behalf have explicitly or implicitly consented to the activities.

Adviser-Led Secondaries

Proposed rule 211(h)(2)-2 would require registered advisers to obtain a fairness opinion in connection with certain adviser-led secondary transactions stating that the price being offered to the private fund for any assets being sold in connection with the transaction is fair. The fairness opinion would be required to be prepared by an independent opinion provider and distributed to investors in the relevant fund prior to the closing of the transaction. The adviser would also have to prepare and distribute a summary of any material business relationships that the adviser or any of its related persons has, or has had, with the opinion provider within the past two years.

Preferential Treatment

Proposed rule 211(h)(2)-3 would prohibit any private fund adviser, regardless of whether they are currently or are required to be registered with the SEC, from providing any preferential terms to certain investors with respect to redemption or information about portfolio holdings or exposures. This prohibition would apply both to investors in a private fund as well as investors in a pool of assets that is substantially similar to a private fund (e.g., a separate feeder fund investing in the same master fund).

The proposed rule would also prohibit advisers from providing any other kind of preferential treatment to any fund investor unless specifically disclosed in writing to prospective and current investors in the same fund. Regarding the level of specificity expected by the SEC, the proposal notes by way of example, that it would not be sufficient to disclose merely that some investors pay a lower fee, but rather that the adviser should describe the lower fee terms in detail, including applicable rate or range of rates. The proposed rule would require that these disclosures be made to prospective investors prior to the investor’s investment and to existing investors on an annual basis if any preferential treatment is provided to an investor since the last notice.

Mandatory Private Fund Adviser Audits

Proposed rule 206(4)-10 generally would require registered advisers to obtain an audit of the financial statements of each private fund managed by the adviser annually and upon liquidation of the fund. The proposed rule would require (i) that the audit be performed by an independent public accountant that is registered with, and subject to regular inspections by, the Public Company Accounting Oversight Board; (ii) that the audit be performed in accordance with U.S. generally accepted auditing standards; (iii) that the audited financial statements be prepared in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP) or contain substantially similar information in the case of non-U.S. private funds with material differences reconciled to U.S. GAAP; (iv) that the audited financial statements be distributed to fund investors promptly upon completion of the audit; and (v) that the adviser must enter into a written agreement with the auditor that would require the auditor to notify the SEC in the event that they resign or are terminated or issue a qualified or other modified opinion.

These requirements likely look familiar to advisers who currently rely on the private fund audit exemption under the Custody Rule; however, there are key differences, and compliance with one rule does not necessarily equate to compliance with the other.


The SEC proposes to amend Rule 204-2 under the Advisers Act to require advisers to maintain the following books and records consistent with the requirements set forth in the proposed rules:

  • (i) Copies of the quarterly statements and a record of each addressee, the date sent, address(es), and delivery method(s); (ii) records evidencing the calculation method for all compensation, expenses, rebates, offers, waivers, and performance listed on any quarterly statement; and (iii) records substantiating the determination that a fund is liquid or illiquid.
  • Copies of the fairness opinion and material business relationship summary distributed to investors, as well as a record of each addressee, the date(s) sent, address(es), and delivery method(s).
  • Copies of all written notices sent to current and prospective investors pursuant to the rule, including the corresponding addressee, date(s) sent, address(es), and delivery method(s).
  • Copies of any audited financial statements, as well as a record of each addressee, date(s) sent, address(es), and delivery method(s).

Written Documentation of Compliance Program Reviews

Finally, the SEC proposes to amend Rule 206(4)-7 under the Advisers Act to require all registered advisers to maintain written documentation of the annual review of their compliance programs. The proposal states that the requirement is intended to be flexible and does not specify what must be included in such documentation. Note that the proposed changes to Rule 206(4)-7 would apply to all registered investment advisers regardless of whether they have private fund clients or not.

Public Comment Period

The public comment period will remain open for 60 days following the publication of the proposed release on the SEC's website or 30 days following the publication of the proposed release in the Federal Register, whichever period is longer. Once the period is over, the SEC will consider the public comments in their final rule.

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