United States: Application Of The Investment Advisers Act To Private Equity Advisers - Part 2

This article is part of a series: Click Application Of The Investment Advisers Act To Private Equity Advisers - Part 1 for the previous article.

Proxy Voting

A registered investment adviser must adopt and implement procedures reasonably designed to ensure that it votes proxies on behalf of its clients in the best interests of its clients.87 Such procedures must address the resolution of material conflicts between the interests of the adviser and the interests of its clients.88 A registered adviser must disclose to clients how they can obtain information about how the adviser voted their securities.89 A registered adviser also must describe its proxy voting procedures to its clients and offer to furnish a copy thereof to them upon request.90 Although the applicable rule is called "Proxy Voting," and private equity advisers are unlikely to vote proxies or be sent proxy statements regularly (as private equity funds will not hold many publicly traded securities), the terms of the rule refer to exercising "voting authority with respect to client securities."91 Consequently, a private equity firm should consider whether it needs to adopt procedures to address the voting of portfolio company securities (e.g., a shareholder consent required to approve a portfolio company transaction).

Code of Ethics

A registered investment adviser must adopt a written code of ethics that, at a minimum:

  1. reflects the adviser's fiduciary obligations and those of its supervised persons, and requires its supervised persons to comply with applicable federal securities laws;
  2. requires the adviser's access persons (generally, advisory personnel, directors, officers, and partners) to provide, and requires the adviser to review, reports regarding such access persons' transactions in and holdings of securities;
  3. requires prompt internal reporting of any violations of the code of ethics to the adviser's chief compliance officer; and
  4. requires the adviser to provide each of its supervised persons with a copy of its code of ethics and any amendments thereto, and requires each such supervised person to acknowledge, in writing, his receipt of such copies.92

Registered advisers are also required to maintain and enforce the provisions of their codes of ethics and pre-clear access persons' investments in initial public offerings and private placements (including investments by advisory personnel in private equity funds managed by the adviser).93

Special issues faced by many private equity advisers regarding the code of ethics include whether certain paid consultants with access to the adviser's recommendations must comply with the code of ethics and whether pre-clearance of personal securities transactions (often considered a "best practice," but not required by applicable law for most transactions) should be adopted in light of the nature of a private equity fund's investments.

Insider Trading

An adviser must establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of the adviser's business, to prevent the misuse of material non-public information by the adviser or by any person associated with the adviser.94 As private equity firms do not generally engage in transactions in publicly traded securities, the issues associated with insider trading may be less prominent.95 However, these requirements take on heightened significance for private equity advisers to the extent they may receive such information in connection with potential going-private transactions or may exchange information with an affiliate that does buy or sell publicly traded securities or otherwise owes a duty to an issuer.


Registration under the Advisers Act will necessitate changes to a number of the practices of a private equity adviser, and the full extent of the changes will not be known unless and until the SEC provides further guidance on a number of interpretive issues arising from the application of the Advisers Act to the private equity business model. In the meantime, a private equity adviser will need to examine its business in light of the requirements of the Advisers Act; conform its practices to those requirements that clearly apply; and, with respect to those requirements that raise unresolved questions, make a determination regarding its approach based on its unique situation and risk tolerance.

Footnotes Continued

87 Advisers Act Rule 206(4)-6(a).

88 Id.

89 Id. Rule 206(4)-6(b).

90 Id. Rule 206(4)-6(c).

91 Id. Rule 206(4)-6.

92 Id. Advisers Act Rule 204A-1(a).

93 Id.; see also Rules 204A-1(c) and 204A-1(e)(7).

94 See Advisers Act § 204A.

95 Although private equity advisers regularly purchase and sell portfolio companies based on inside information, generally insider trading laws are not violated unless such purchase or sale is based on such information in breach of a duty of trust or confidence that is owed directly, indirectly, or derivatively, to the issuer of the relevant security or the shareholders of that issuer, or to any other person who is the source of the material non-public information. In a typical negotiated private equity transaction with shareholders of an issuer, there would not be such a breach.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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This article is part of a series: Click Application Of The Investment Advisers Act To Private Equity Advisers - Part 1 for the previous article.
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