Final Rule — Private Fund Advisers and Documentation of Annual Compliance Review

On August 23, 2023, the U.S. Securities and Exchange Commission adopted the Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews final rule. According to the adopting release, these rules are designed to address several risks in the relationship between advisers with private funds and their investors, including a lack of transparency, conflicts of interest and lack of effective governance mechanisms for client disclosure, consent and oversight.

The Final Rule adopts new rules and amendments under the U.S. Investment Advisers Act of 1940, as amended, and it will require all private fund advisers, including certain exempt reporting advisers to meet specific disclosure, consent and other requirements prior to engaging in certain “restricted” activities and granting certain preferential treatment to investors. The Final Rule will also require registered private fund advisers to (i) provide quarterly statements to investors with detailed fee, expense and performance information, (ii) perform annual financial statement audits of advised funds, and (iii) obtain a valuation or a fairness opinion in connection with adviser-led secondary transactions, among other requirements. Also, the Final Rule will require all registered private fund advisers to document annual compliance reviews in writing.

Private fund advisers are already scoping and assessing the potential impact of the Final Rule on their businesses and planning how to navigate the requirements of the Final Rule. Nuanced issues will surface, and market practice will evolve over the course of the next year, but the Final Rule will undoubtedly have a major impact on, and significantly increase compliance burdens for, private fund advisers. While the Final Rule will cause a significant shift in the regulatory landscape governing private fund advisers, these rules will not impact all private fund advisers equally. Whether an adviser is subject to the Final Rule will generally depend on (i) the registration status of the adviser, (ii) whether the adviser is a U.S. or non-U.S. adviser and (iii) whether the adviser is managing a U.S. or non-U.S. private fund, among other factors.