On February 9, 2022, the Securities and Exchange Commission ("SEC") voted 3 to 1 to propose five new rules (the "Proposed Rules") under the Investment Advisers Act of 1940 (the "Advisers Act") imposing significant new reporting requirements on registered private fund advisers, requiring annual audited financial statements for private funds, mandating fairness opinions for adviser-led secondary transactions, prohibiting certain fee and other arrangements for all advisers to private funds, and requiring all registered investment advisers to document their annual compliance review in writing.1 Finally, the SEC proposes amendments to Rule 204-2 under the Advisers Act to impose recordkeeping requirements related to the Proposed Rules. Each of those proposals is described in more detail below.

A. Quarterly Statements

Proposed Rule 211(h)(1)-2 would require registered advisers that manage private funds to distribute a quarterly statement to the investors in those funds that describes in detail:

(i) all fees and expenses paid by the private fund during the reporting period; (ii) fees and expenses paid by underlying portfolio investments to the adviser and its related persons; and (iii) performance information based on standardized metrics that differ based on whether the adviser classifies the private fund as a liquid or illiquid fund (as defined below).

As proposed, only fund-level information would be required.2 Private fund advisers would not be required to provide personalized account statements showing each individual investor's fees, expenses, and performance. The SEC notes that the quarterly statement is necessary to improve the quality of information provided to private fund investors, allowing them to assess and improve the comparability of their private fund investments. The specific statement requirements include the following:

(i) Fees and Expenses Paid by the Private Fund

The Proposed Rule would require private fund advisers to disclose the following information to investors in a table format:

  1. "Adviser Compensation": A detailed accounting of all compensation, fees, and other amounts3 paid to the adviser or any of its related persons4 by, or allocated to, the private fund during the reporting period;
  2. "Fund Expenses": A detailed accounting of all fees and expenses paid by the private fund during the reporting period, other than Adviser Compensation; and
  3. The amount of any offsets or rebates carried forward during the reporting period to subsequent quarterly periods to reduce future payments or allocations to the adviser or its related persons.5

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Footnotes

1 See Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Advisers Act Release No. 5955 (Feb. 9, 2022) (the "Proposing Release"), available here

2 Proposed Rule 211(h)(1)-2(b).

3 Proposed Rule 211(h)(1)-2(b)(1) is designed to capture all compensation, fees, and other amounts allocated or paid to the investment adviser or any of its related persons by the fund, including, but not limited to, management, advisory, sub-advisory, or similar fees or payments, and performance-based compensation.

4 Proposed Rule 211(h)(1)-1 defines "related persons" to include: (i) all officers, partners, or directors (or any person performing similar functions) of the adviser; (ii) all persons directly or indirectly controlling or controlled by the adviser; (iii) all current employees (other than employees performing only clerical, administrative, support or similar functions) of the adviser; and (iv) any person under common control with the adviser. Proposed Rule 211(h)(1)-1 defines "control" consistently with Form ADV as "the power, directly or indirectly, to direct the management or policies of a person, whether through ownership of securities, by contract, or otherwise."

5 Proposed Rule 211(h)(1)-2(b)(3) would require advisers to disclose adviser compensation and fund expenses in the fund table both before and after the application of any offsets, rebates, or waivers. Specifically, the Proposed Rule would require an adviser to present the dollar amount of each category of adviser compensation or fund expense before and after any such reduction for the reporting period. In addition, the Proposed Rule would require advisers to disclose the amount of any offsets or rebates carried forward during the reporting period to subsequent periods to reduce future adviser compensation.

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